Rocket Companies, Inc. (RKT - Get Rating) in Detroit, Mich., is a tech-driven real estate platform operating in the United States and Canada. With more than 26,000 team members, RKT operates as a personal finance and consumer technology platform through two segments: Direct to Consumer; and Partner Network. 

However, RKT has an ISS Governance QualityScore of 10, indicating high governance risk.

Shares of RKT have declined 12.8% in price year-to-date and 41.7% over the past year due to bleak growth prospects and shrinking profit margins.

Here is what could shape RKT’s performance in the near term:

Poor Financials

For its fiscal third quarter, ended Sept. 30, 2021, RKT’s revenues declined 32.5% year-over-year to $3.11 billion. This can be attributed to a 38% decline in net gains from the sale of loans. Its EBT came in at $1.43 billion, reflecting a 53.4% decline from the prior-year quarter. And its net income slumped 54% from the same period last year to $1.39 billion. Its comprehensive income stood at $1.39 billion, down 53.7% from the year-ago value.

Lawsuits

Several class-action lawsuits have been filed against RKT, alleging that the company made several false and misleading statements and failed to disclose material information about its operations. RKT allegedly failed to disclose that the company’s gain on sales margins was contracting due to increased competition in the mortgage lending market. Also, RKT allegedly engaged in price wars to gain market share in the wholesale market, further compressing the company’s Partner Network operating segment margins. Thus, as the company’s gain-on-sale margins fell materially below the pre-pandemic averages despite surging demand, RKT’s positive statements about its operations have allegedly been materially misleading and/or lacked a reasonable basis.

Unfavorable Growth Prospects

Analysts expect RKT’s revenues to decline 44.9% in its fiscal year 2021 fourth quarter (ended December 2021), 48.6% in the fiscal 2022 first quarter (ending March 2022), and 22% in fiscal 2022. The consensus EPS estimates indicate a 68.4% decline in the about-to-be-reported quarter, 66.3% decline in the current quarter, and 35.1% decline in the current year. In addition, the Street expects RKT’s EPS to slump at a rate of 30.3% per annum over the next five years.

POWR Ratings Reflect Bleak Prospects

RKT has an overall D rating, which translates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

RKT has a grade of D for Sentiment and Stability. The company’s bleak revenue and earnings growth prospects match the Sentiment grade. In addition, the stock’s relatively high 1.20 beta justifies the Stability grade.

Of the 115 stocks in the D-rated Financial Services (Enterprise) industry, RKT is ranked #88.

Beyond what I have stated above, view RKT ratings for Growth, Quality, Momentum, and Value here.

Bottom Line

Despite the red-hot housing market and rising mortgage rates, RKT’s profit margins have taken a hit. As the Fed gears to hike benchmark interest rates next month, mortgage rates are expected to climb further in the coming months. However, analysts expect RKT’s profit margins to decline in the near term. Furthermore, given the multiple lawsuits filed against RKT, we think the stock is best avoided now.

How Does Rocket Companies, Inc. (RKT) Stack Up Against its Peers?

While RKT has a D rating in our proprietary rating system, one might want to consider looking at its industry peers, Forrester Research, Inc. (FORR - Get Rating), Donnelley Financial Solutions, Inc. (DFIN - Get Rating), and CPI Card Group Inc. (PMTS - Get Rating), which have an A (Strong Buy) rating.

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