An Altisource Insider Could Be Right

 | Mar 13, 2013 | 11:06 AM EDT  | Comments
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Ronald Mueller-Ineichen, a board member at Altisource Portfolio Solutions (ASPS), bought 1,000 shares of the company's stock on March 8 at an average price of $82.99 per share. He now owns nearly 10,000 shares directly.

Altisource's business segments include a mortgage services unit, which provides services to real estate investors, including property inspection and processing, and a financial services segment, which collects on debt and otherwise manages customer services for lenders and debt servicers. Insider purchases can be taken as signals that a particular insider is confident in the stock price, since the insider is committing his or her own capital to the company rather than diversifying wealth as economic theory would predict.

Altisource is up 32% in the last year as investors become more confident in a recovery in real estate and therefore in investing in companies whose businesses are tied to real estate. In 2012, the company recorded 34% revenue growth compared with a year ago, after a 41% revenue growth rate in 2011.

While Altisource's costs have increased as well, margins have widened, with the result being 56% earnings growth in the last year and a compound annual growth rate of 50% in the last two years. However, growth did slow down in the fourth quarter of 2012, as net income was "only" 18% higher than a year earlier. Looking at the quarterly data, we can see that while earnings were higher last quarter than in any other quarter in 2012, improvements were limited, and revenue appears to have been about average compared with the other three quarters.

The stock's trailing price-to-earnings ratio is 19, so the current price does depend on further growth in spite of the limited improvements over the last few quarters. Altisource has a very limited following on the Street, but that following is optimistic. The consensus for this year is for earnings per share of $7.04, up from the $4.43 that the company reported in 2012. That makes for a current-year earnings multiple of 12, and if Altisource does hit that target, it would need only modest growth from that point in order to be undervalued.

That growth is anticipated to come from Ocwen Financial (OCN), which, as Altisource's largest customer, is responsible for 60% of total revenue. Ocwen, an originator and servicer of mortgage loans, has been growing rapidly (its revenue was up 51% last quarter compared with the fourth quarter of 2012), as it has been a very active acquirer. Another large acquisition closed in February 2013, and we would not be surprised if Ocwen continues to add to its business. This growth represents a prime opportunity for Altisource -- a growing customer should mean that its own business will grow, without having to confront integration risk itself. Though of course the degree of customer concentration is already high, and it would only increase if future growth comes primarily from Ocwen.

In the near term, we believe that Altisource will derive significant growth from Ocwen, though it appears that its growing customer has not helped it much over the last year: Revenue numbers show very little change if we look at each quarter of 2012. That is a point that potential investors would have to investigate. It would also be desirable to somehow quantify the effect of more integration activity; if Ocwen is currently responsible for 60% of revenue, an acquisition which increases its need for Altisource services by 25% would single-handedly increase revenue by 15% (and similarly for other figures). Of course, those growth rates would depend to a large degree on continued acquisitions at Ocwen, and certainly this much customer concentration is not ideal.

So the most likely value scenario would involve, in line with the sell side's casts, a large boost to EPS this year and then low growth rates. We would want to look at how much revenue growth Altisource could actually expect for 2013 and then attempt to determine how margins would change in order to judge its chances of meeting expectations.

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