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Bear of the Day: HomeStreet Inc. (HMST)

Zacks

HomeStreet Inc. (HMST), a Zacks Rank #5 (Strong Sell) is a diversified financial services company. The Company is engaged in real estate lending, including mortgage banking activities and retail and business banking operations and serves consumers and businesses in the Pacific Northwest and Hawaii. It offers deposit and investment products and cash management services and single family loans and commercial loans.

Recent Earning Report

In its most recent earnings report the company beat the Zacks consensus earnings estimate, and met the revenue estimate. Earnings grew by +330%, and revenues improved by +2.5%. The bulk of the gains came from the commercial and consumer banking results. The platform realized a +36% YoY improvement in net income. But the mortgage banking segment came in below expectations.

Future Headwinds

The Seattle area, which accounts for more than half of the company’s earnings production, has been suffering from limited housing inventory for the past few quarters. Further, early indications are that the supply of homes in Seattle have continued to decline in the first few months of 2018.

Another obstacle for the company going forward is the increase of interest rates, which caused many home owners to refinance their properties at longer fixed rates in Q4 17; the refinancing helped Q4 results, but expectations are for much fewer homeowners to refinance properties in 2018. The combination of these two factors has reduced the total amount of opportunities in the region and therefore competition is rising for the smaller pool of clients.

Management’s Take

According to Mark K. Mason, Chairman, President, and CEO, “While the results of our Mortgage Banking segment continue to be adversely impacted by the limited supply of new and resale housing in many of our primary markets, as well as the seasonal production slowdown we typically experience at the end of the year, we have begun to see the benefits of the restructuring we implemented during 2017. Direct origination expenses are lower and the successful implementation of our new loan origination system during 2017 will create opportunities for additional operating efficiencies going forward. We will continue to focus on optimizing our mortgage banking capacity within our existing geographic footprint and remain committed to being a leading mortgage originator and servicer in our markets.”

Price and Earnings Consensus Graph

As you can see in the graph below, the stock price has been falling since the beginning of the year as a result of limited housing inventory in the Seattle area, and a weak refinance market.

HomeStreet, Inc. Price and Consensus

HomeStreet, Inc. Price and Consensus | HomeStreet, Inc. Quote

Declining Earnings Estimates

Over the past 30 days earnings estimates for Q1 18, Q2 18, FY 18 and FY 19 have all been negatively revised; Q1 18 fell from $0.53 to $0.38, Q2 18 dropped from $0.79 to $0.71, FY 18 was cut from $2.38 to $2.05, and FY 19 declined from $2.66 to $2.38.

Bottom Line

While the Seattle area is attempting to increase its housing inventory it will take some time to match the overall demand. Further, the expected rate hikes in 2018 have caused many home owners to refinance their homes already, further weakening future refinance applications.

If you are inclined to invest in the Financial/Savings & Load segment you would be best served by looking into Pacific Premier Bancorp (PPBI) who currently carries a Zacks Rank #1 (Strong Buy), or Great Southern Bancorp (GSBC), who currently carries a Zacks Rank #2 (Buy) rating.


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