On Dec 3, we downgraded our long-term recommendation for
business services provider
Lender Processing Services, Inc.
) from Neutral to Underperform. The relegation was primarily
driven by downward fiscal earnings estimate revisions amid a
challenging macroeconomic environment. However, if the company
can tide over the current negative investor perception, it can
expect a steady reversal of fortunes in future.
Why the Downgrade?
Lender Processing was spun off from Fidelity National Services in
July 2008. The company completed just four years of independent
operation and is continuing to integrate the additional expenses
associated with replicating systems, infrastructure and personnel
as a standalone company. Moreover, an increased amount of debt
post spin-off and its associated interest payment will continue
to put pressure on the company's earnings and cash flow.
The company's business model is highly sensitive to government
regulation, political risk and litigation. Any unfavorable
legislation and/or lawsuits will likely impact the housing,
origination and foreclosure business, impairing the overall
growth of the company.
The continued underperformance in the company's Default services
business remains a cause of concern. Hit by lower transaction
volumes, the Default services revenues continue to experience
challenging market conditions, which call for new regulations and
process changes related to foreclosure activity. Providing
cost-effective services to clients' needs for regulatory
compliance has become difficult for Lender Processing in the
However, Lender Processing has historically maintained a balanced
operating model that is designed to provide a natural hedge
during fluctuations in the real estate market. Given the scope of
the services provided, the company stands to maintain revenue
strength at both ends of the mortgage cycle. While the loan
facilitation services along with various data and analytics
segments stand to generate higher revenues when interest rates
are low and the residential housing market is strong, the
company's default management services are positioned to generate
higher revenues when the residential real estate market is
particularly weak and foreclosures are numerous.
Moreover, despite the substantial regulatory and market
challenges that Lender Processing and the entire mortgage
industry is facing, the company has not lost any major customer
as well as new business opportunity in the recent past. The
unique combination of scale, expertise and innovation continues
to position Lender Processing as a leader in technology-driven
solutions for the evolving mortgage industry.
Other Stocks to Consider
Lender Processing has a Zacks Rank #5 (Strong Sell). Other
players in the industry worth considering include
Global Payments Inc.
Higher One Holdings, Inc.
), each carrying a Zacks Rank #2 (Buy).
GLOBAL PAYMENTS (GPN): Free Stock Analysis
LENDER PROC SVC (LPS): Free Stock Analysis
HIGHER ONE HLDG (ONE): Free Stock Analysis
XOOM CORP (XOOM): Free Stock Analysis Report
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