Analyst Note| Michael Miller |
We are initiating coverage on Rocket Companies with a $21 per share fair value estimate, narrow-moat rating, and an exemplary capital allocation rating. We consider the stock 17.4% undervalued based on the $17.35 closing price on Aug. 31. Our fair value translates to 10 times our 2021 earnings projection. This may appear low, but Rocket is coming off a cyclical peak in mortgage origination profitability that started in 2020 and extended into 2021 as low interest rates drove higher mortgage refinance activity. We do not expect earnings to return to their prepandemic levels, as Rocket has gained market share during the pandemic, but the company’s future earnings growth will likely occur off a lower normalized base.