Rocket Companies Earnings: Low Mortgage Volume Pressures Results, but Conditions Have Stabilized

Narrow-moat-rated Rocket Companies RKT reported decent second-quarter earnings, which came in better than our low expectations, even as the firm is pressured by weak mortgage conditions industrywide. Rocket’s top- and bottom-line results benefited from a positive $235 million fair value adjustment to the firm’s mortgage servicing assets, which get treated as revenue. Excluding this, adjusted revenue fell 11% year over year, but increased 13.5% from last quarter, to $1 billion. Meanwhile, adjusted net losses decreased more than 50% from last year to $33 million. As we incorporate these results, we do not expect to materially alter our $13 per share fair value estimate. We see the shares as undervalued on a full-cycle basis, but near-term results will remain weak until mortgage rates fall, given that Rocket is so highly leveraged to the mortgage cycle.

Mortgage origination volume, the largest driver of Rocket’s revenue, fell 35% from last year but rose 32% sequentially to $22.3 billion. Additionally, negative mix shift and more promotional pricing helped lower Rocket’s average gain on sale margin to 2.67% this quarter from 2.92% last year. On a more positive note, both Rocket’s origination volume and average gain on sale margin have improved sequentially two quarters in a row now. While the firm continues to be hurt by low refinance activity and low housing turnover, strong demand from first-time buyers appears to be stabilizing the company’s results.

Additionally, while revenue has declined dramatically from its peak levels, Rocket remains in a healthy financial position because of significant cost-cutting. Operating expenses declined 16.5% from last year to $1.1 billion in the second quarter, with the firm expecting to reduce annual expenses by another $150 million-$200 million. Rocket also retains a strong balance sheet, with $880 million in cash and $6.4 billion in mortgage servicing assets held against around $4.4 billion in non-mortgage-related debt.