Detroit, Mich.-based holding company Rocket Companies, Inc. (RKT) operates in tech-driven real estate, mortgage, and eCommerce businesses in the United States. It offers Rocket Mortgage, a mortgage lender; Rocket Loans, an online-based personal loans business; Rocket Homes, a real estate search platform; and other related solutions. RKT’s share price has soared 3.8% over the past five days, driven by its record mortgage volume in the second quarter. 

But RKT’s stock is down 9.6% in price year-to-date. Closing yesterday’s trading session at $18.29, the stock is currently trading 57.5% below its 52-week high of $43.

Although a low-interest-rate environment has helped the company achieve record loan-origination volume in its last reported quarter, its gain-on-sale margin declined significantly. In the Direct-to-Consumer segment, RKT’s adjusted revenue declined 44.4% year-over-year. Furthermore, ongoing class-action lawsuits against the company and increased competition in the housing market could make the stock a risky buy right now.

Here is what we think could influence RKT’s performance in the upcoming months:

Growing Rivalry

Amid the current  surge in housing prices as demand exceeds supply and with ultra-low interest rates, origination volume has increased. However, this has led to aggressive competition in the mortgage lending space. United Wholesale Mortgage has emerged as the biggest threat to RKT’s market share. In March, UWM’s CEO said the company would no longer work with any mortgage brokers who also conducted business with Quicken, which is owned by RKT. While RKT remains a dominant player in the mortgage lending market, it trails UWM in wholesale mortgage lending.

Ongoing Lawsuits and Investigations

This month, Levi & Korsinsky, LLP, The Gross Law Firm, Jakubowitz Law, and several other law firms filed securities fraud class action lawsuits against RKT on behalf of its shareholders, on matters concerning allegedly materially false or potentially misleading statements made by the company. Furthermore, Labaton Sucharow, a shareholder rights firm, has started investigating the real-estate mortgage company for a potential breach of fiduciary duty. These class-action lawsuits and investigations could lead to a price decline by the stock in the near term. 

Bleak Financials

For the second quarter, ended June 30, 2021, RKT’s net gain on sale of loans declined 50.7% from its  year-ago value to $2.34 billion, while its net loan servicing loss came in at $71.4 million. It reported  $920 million in adjusted net income, down 67.7% from the prior-year quarter. Also,  the company’s adjusted EBITDA declined 66.7% year-over-year to $1.28 billion. RKT’s gain on sale margin stood at 2.8% for this quarter, compared to 5.2% in the prior-year period.

RKT’s trailing-12-month levered free cash flow is negative 15.9%. In addition,  the company’s ROA and ROE of 1.1% and 12.4%, respectively,  are 16.4% and 1.3% lower than their industry averages. Its 2.3%  trailing-12-month net income margin is 92.4% lower than the 29.7% industry average.

Bleak Growth Prospects

Analysts expect RKT’s revenue to decrease 28.6% in the current year and 18.7% next year. Also, its revenue is estimated to decline 39.7% year-over-year to $2.75 billion in the next quarter, ending September 30, 2021. The company’s EPS is expected to decrease 64.5% year-over-year to $0.43 next quarter. And the Street expects its EPS to decline at a 30.3% rate per annum over the next five years. In addition, its EPS is expected to decrease 48.7% in its fiscal year 2021 and 27.5% in fiscal 2022.

Unfavorable POWR Ratings

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

Our proprietary rating system also evaluates each stock based on eight distinct categories. RKT has a C Value Grade. Its 4.19x trailing-12-months Price/Book ratio, which is 243% lower than the 1.22x industry average, justifies the grade.

In terms of Growth Grade, RKT has an F, which is in sync with the company’s inadequate growth prospects.

Also, it has a D grade for Stability, reflecting that the stock is more volatile than its peers.

Click here to see the additional POWR Ratings for RKT (Quality, Sentiment, and Momentum).

RKT is ranked #92 of 104 stocks in the D-rated Financial Services (Enterprise) group.

Bottom Line

While RKT has seen a substantial improvement in closed-loan volume in its  last reported quarter, it has not taken full advantage of the hot housing market. Furthermore,  the company’s gloomy financials and current challenges in its business might hamper its growth prospects. So, we think it could be wise to avoid the stock now.

How Does Rocket Companies (RKT) Stack Up Against Its Peers? 

RKT has an overall POWR Rating of D. So one  might want to consider taking a look at its industry peers Forrester Research, Inc. (FORR), Donnelley Financial Solutions, Inc. (DFIN), and Santander Consumer USA Holdings Inc. (SC), which each have an A (Strong Buy) rating.

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