Rocket Companies, known by its Quicken Loans brand, has leaned hard into a surge of refinancing demand.
Photo: John Kuntz/Associated PressIt’s one thing to launch a rocket. It’s another to keep it flying.
Rocket Companies, the Detroit-based mortgage lender long known by its Quicken Loans brand, is poised to begin trading publicly on Thursday. It priced below its projected range, at $18 a share, giving it a market capitalization of roughly $35 billion. That would value it in the neighborhood of eight times its estimated net income over the past 12 months, based on the midpoint of the guided range for second-quarter 2020.
Though some initial public offerings this year have gone stratospheric, that valuation isn’t lunacy. It is difficult to find a direct comparable for Rocket, as it isn’t a bank, but is far larger and more diversified than other nonbank lenders that originate and sell loans. The S&P 500 financial sector overall trades at 12 times trailing-year earnings. Brian Foran, analyst at Autonomous Research, says that lenders that primarily sell loans, including names like Countrywide before the 2008-09 financial crisis, have typically hovered around eight times forward earnings.
The trick for Rocket investors is the “forward” part. Investors here might have to envision a more normalized baseline than the most recent trends. That is because this year has been a historically good time to be in the business of refinancing mortgages, a function of rock-bottom interest rates and strong home values.
Rocket has leaned hard into the surge, even as some other lenders have had to turn borrowers away due to balance-sheet and technology constraints. It set four consecutive monthly records for closings through July, and says second-quarter originations grew 40% from the first quarter. That is good for a two-percentage-point gain in its mortgage market share from 2019 to nearly 9%, the company says. Inside Mortgage Finance ranks it the largest U.S. mortgage lender in the first half of the year.
Many don’t expect this boom to last, particularly in refinancing. As of mid-July, the Mortgage Bankers Association forecast 1-to-4 family residential mortgage originations to drop 25% from 2020 to 2021, with a more than 50% decline in refinancing volume. Rocket had a more dominant share in the refinancing market, at nearly 11%, than it did in home buying, at around 3%, according to Inside Mortgage Finance’s first-quarter rankings. In addition, the spread between 30-year mortgage rates and 10-year U.S. Treasurys—one proxy for how much the market will pay to buy a mortgage—has narrowed from a high point in April.
To keep growing, Rocket is betting on its leading brand, technology platform and vertical integration with homebuying components like title insurance services to drive both volume and margin growth. That is the tech angle that allows Rocket to be marketed as a “fintech” IPO. There is a case to be made that if and when millennials really plunge into homebuying, Rocket could expand market share with its heavily-marketed “push button, get mortgage” app—though there are a bevy of competitors emerging in that space, too, including traditional banks. Rocket’s ambitious mission is to grab 25% U.S. mortgage market share
Notably, Rocket doesn’t currently plan to pay a dividend to public holders, even as it expects to have more than $1.6 billion in cash at the end of the first half. That cash could fund more partnership deals to bring in customers and help accelerate its vertical mortgage and horizontal services expansion. Deploying extra fuel might be necessary to convince investors it can keep ascending.
Write to Telis Demos at telis.demos@wsj.com
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