We have downgraded our recommendation on
Lender Processing Services Inc.
) to Neutral from Outperform based on a host of factors like
lower-than-expected revenue in the third quarter, a conservative
guidance for the fourth quarter, continued underperformance in
Default Services, and last but not the least macroeconomic
ENVESTNET INC (ENV): Free Stock Analysis
LENDER PROC SVC (LPS): Free Stock Analysis
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While we believe that Lender Processing's technology-driven
end-to-end solutions for the mortgage and real estate industries
will aid in generating modest business growth and positions it to
capitalize on market recovery, the company's recent revenue
performance refrains us from being too optimistic. Total revenue
in the third quarter declined year over year and lagged the Zacks
Consensus Estimate as well.
The continued underperformance in the company's Default Services
business remains a cause of concern. Default Services revenue
declined 15% sequentially and 22% year over year in the third
quarter of 2012, due to muted industry volumes. Hit by lower
transaction volumes, the Default Services revenue continues to
experience challenging market conditions, which calls for new
regulations and process changes related to foreclosure activity.
Providing cost-effective services to clients' needs for
regulatory compliance in a profitable manner has been difficult
for Lender Processing in the recent quarters. At the same time,
management expects foreclosure activity to continue to reel under
pressure and default services revenue to decline in the fourth
quarter of 2012.
We are also skeptical about the company's 2013 outlook as there
are certain near-term hurdles in the economy including the result
of the U.S. presidential election and its consequence on the
The impact of the federal programs due to budget pressures is
also a matter of concern. Any unfavorable legislation will likely
impact the housing, origination and foreclosure business as well
as the company's growth.
In the upcoming fourth quarter of 2012, management expects
revenue from its rather well-positioned segment, Technology,
Data, and Analytics solutions, to remain flat sequentially. It
also expects refinance origination volumes, which is one of the
most important lines of LPS' business, to remain slightly down in
the fourth quarter.
Over the last 30 day period, four analysts out of eight slashed
Lender Processing's fourth quarter earnings estimate, while three
analysts moved in the opposite direction. The Zacks consensus
Estimate also fell 2 cents to 67 cents over that period. This
downward trend was also visible over the last 7 day period.
Lender Processing, which competes with the likes of
), currently carries a Zacks #3 Rank, which translates into a
short-term 'Hold' rating.