The last few years have been extremely beneficial for players in the mortgage lending space. A low-interest-rate environment and an increase in consumer spending have acted as primary drivers in top-line growth for mortgage lenders, such as Rocket Companies (RKT) and LendingTree (TREE).
However, both stocks have lost momentum in recent months. RKT stock is down 62% from all-time highs and is valued at a market cap of $31 billion. TREE has lost close to 70% from all-time highs and has a market cap of $1.61 billion.
Today I’ll analyze both mortgage stocks to determine which is currently the better buy.
Rocket Companies is engaged in tech-driven real estate, mortgage, and eCommerce businesses in the U.S. and Canada. It has two primary business segments that include Direct to Consumer and Partner Network. In addition to mortgage lending, it provides solutions that include title insurance, property valuation, and settlement services. It also offers a real estate buying and selling platform while Rocket Auto is an automotive retail marketplace.
Rocket Mortgage is the largest mortgage originator in the U.S. and leverages technology to gain an advantage over other legacy players. Its direct-to-consumer business model allows the company to undercut loan officers, increasing profitability in the process. A loan officer generally charges upto 2% of the mortgage amount as the commission.
Rocket Companies has increased sales from $4 billion in 2017 to $15.54 billion in 2020. However, analysts expect the company’s sales to decline by 25% to $12.75 billion in 2021 and by 20.3% to $10.15 billion in 2022. This decline in the top-line will also lead to lower profit margins as adjusted earnings are forecast to narrow from $4.11 per share in 2020 to $1.55 per share in 2022.
LendingTree operates an online consumer platform in the U.S. It has three business segments that include Home, Consumer, and Insurance. The company’s sales rose from $617 million in 2017 to $1.1 billion in 2019. It then fell to $909 million in 2020. Analysts now expect sales to rise by 21.5% to $1.11 billion in 2021 and by 12.6% to $1.24 billion in 2022. Its adjusted earnings are forecast to more than double from $1.54 in 2020 to $3.46 in 2022.
In Q3 of 2021, LendingTree’s Home segment business rose by 42% year over year to $112.4 million while Consumer segment sales more than doubled to $100 million. Comparatively, Insurance sales were down 8% at $26.6 million.
It’s evident that LendingTree’s business is rebounding towards pre-pandemic levels. Its Home segment produced record Q3 results and the company should benefit from the ongoing recovery in the Consumer segment. Further, LendingTree is confident of growing market share in the insurance business in the future, making it a top stock right now.
I believe LendingTree is currently a better investment than Rocket Companies. That’s because LendingTree is valued at a forward price to 2022 sales multiple of 1.3x and a price to earnings multiple of 34.6x. Comparatively, Rocket Companies is wrestling with falling revenue as well as profitability. It’s valued at a price to sales multiple of 3x and a price to earnings multiple of just 10x.
LendingTree’s earnings are also forecast to increase at an annual rate of 75% in the next five years. And analysts tracking the stock also expect Lending Tree to almost double in the next 12-month period.
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RKT shares were trading at $15.69 per share on Friday afternoon, down $0.05 (-0.32%). Year-to-date, RKT has declined -22.40%, versus a 23.96% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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