Bull of the Day: Flagstar Bancorp (FBC)

Flagstar Bancorp, Inc. (FBC) is able to cash in on the hot housing and mortgage markets. This Zacks Rank #1 (Strong Buy) posted its best quarter in company history during the second quarter.

Flagstar is a savings and loan holding company in Michigan. It provides commercial, small business and consumer banking services through 160 branches in Michigan, Indiana, California, Wisconsin and Ohio.

It also provides home loans in all 50 states. It is a leading national originator and servicer of mortgage and other consumer loans, handling payments and record keeping for $214 billion of loans for nearly 1 million borrowers.

Huge Beat in the Second Quarter

On July 28, Flagstar reported its second quarter results and crushed the Zacks Consensus by 47.1%. It reported earnings of $2.03 versus the consensus of $1.38.

It was the best quarter in the company's history.

In banking, net interest margin was up 5 basis points, with a $20 million increase in net interest income.

Meanwhile, with mortgage rates dropping, and the home market heating up, it saw mortgage revenue of $295 million as the gain on sale margin jumped to 2.19% from 0.8% in the prior quarter.

Flagstar, like most banks in the quarter, set aside an additional $100 million in the quarter for future loan losses. This raised its credit reserves to $250 million.

It's coverage ratio rose to 1.69% overall.

It has a diverse business. Flagstar saw a big contribution from its warehouse business, in addition to the banking and mortgage business, in the quarter.

Estimates Shoot Higher

Analysts were taken by surprise with the big gains in the mortgage business as no one knew what to expect with the housing market during the lock down and once the country re-opened.

But housing demand has exploded. Low mortgage rates are also causing a rush to refinance.

Even with Freddie Mac and Fannie Mae putting on a new 50 basis points tax on refinancing, which begins on Sep 1, the mortgage market is expected to remain hot through the end of the year.

4 estimates have been raised for 2020 in the last month, which has pushed the Zacks Consensus Estimate up to $6.34 from $3.84 during that time.

That's earnings growth of 83.2% as Flagstar only made $3.84 last year.

Analysts are unsure how long the hot mortgage market will last so they're predicting some cooling in 2021.

But 3 estimates have been raised for that year, as well, pushing up the Zacks Consensus to $4.37 from $3.08 just 30 days before.

Shares are Dirt Cheap

Shares are up 6.6% over the last month, but are still down 22.3% year-to-date.

With those earnings estimates soaring, that gives Flagstar a forward P/E of just 4.7.

It also has a price-to-book ratio of just 0.9.

It's a dirt cheap stock which also pays a dividend, currently yielding 0.7%.

With a market cap of just $1.7 billion, it pays for investors to look beyond the Big Cap banks like Wells Fargo (WFC) and JPMorgan Chase (JPM) to find a business model with earnings growth.

Wells Fargo is expected to see an earnings decline of 99% and JPMorgan Chase a decline of 44%.

For investors looking for a cheap bank, Flagstar is one to keep on the short list.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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