ASPS - Altisource

[portfolio14]

oh yessss

 

right? I mean the guy has been quite irrational. Seems that when he is gone, it is likely problems go away for OCN/ASPS

 

Gone? How about Erbey employs Lawsky?

[Liberty]

http://www.sec.gov/Archives/edgar/data/1462418/000110465914079323/a14-24266_1ex99d1.htm

[krazeenyc]

http://www.sec.gov/Archives/edgar/data/1462418/000110465914079323/a14-24266_1ex99d1.htm

 

This is essentially my worry for ASPS, that the regulators would force them out of the status quo. My guess is this is prelude to a settlement -- but who knows.

[scorpioncapital]

Any ideas what is the ultimate cost of this change? They say 50 cents per quarter for 1 year. So $2/share or roughly $50 million. The question is what is the ongoing reduction in annual profit?

[yadayada]

probably quite sizable? between 1/4 and 1/5 of profit?

 

At this point I don't care anymore. I will just close my eyes on this one for a year and wait it out lol. Even if 1/4 of profit is hacked away, without regulators halting their business, this stock should trade north of 100$.

[scorpioncapital]

Less.

 

"Closing and insurance services

 

37,849

"

 

For 2012 - that's insurance services with related parties. From what I understand, this only affects the insurance line with related party Ocwen. If I'm mistaken, let me know!

 

And that's revenue. Even if margins are 50%, that's about 20 million per year, let's say 30-40 million to be safe.

[wbr]

That's why you have a margin of safety.

 

$8 FCF/share instead of $10 FCF/share because of discontinued operations? Ok but let's be conservative and make it $7/share because OCN stagnates at the moment.

 

Still less than 10x FCF.

[scorpioncapital]

It's a bit confusing how they state the profit impact. 50 cents for 1 year, that seems to imply no impact afterwards? They are assuming their other businesses will grow by $2/share over the next year?

[Ross812]

The discontinuation of this business line is expected to reduce Altisource’s quarterly diluted earnings per share by an average of approximately $0.50 - $0.65 for the period October 1, 2014 through December 31, 2015

 

50c-65c per quarter - $2 to $2.60 per year. 

 

They are probably not forecasting further. Not good.

 

We are probably looking at <$5 in earnings for '15.

[scorpioncapital]

"The New York Department of Financial Services is questioning Altisource Portfolio Solutions' practice of force-placed insurance, calling the transaction troubling, and saying that parent Ocwen Financial Corporation (OCN) may  be funneling as much as $65 million to Altisource even though his office has raised concerns about potential conflicts of interest between such entities."

 

"n an open letter dated Monday to Ocwen’s general counsel, Timothy Hayes, Lawsky raises a series of questions, alleging that there exists a complex arrangement related to force-placement that “appears designed to funnel as much as $65 million in fees annually from already-distressed homeowners to Altisource for minimal work.”"

 

I think this is what is being discontinued. Now if those fees are net, then this is about 1/3 of net profit. If the number quoted is revenues, then this is a much smaller amount.

 

Still this meshes with the financial statements. On the 10-q for 9 months ended Sep 2014 the related party insurance fees is about 45 million. That comes out to about 65 million per year which is what the regulator claimed.

 

(It appears the profit margin is about 99% - 2013 was 120m rev and 1.6m expenses).

 

Since they are earning about 180m in 2014, if you deduct 60 million, seems the going forward profits are 120m per year + any growth. Since Ocwen is in stasis/run-off at the moment until they get a green light from regulators, we can assume growth is small if not zero from that major customer. The growth will have to come from 3rd parties.

 

At 60/share it's trading at ~11.6x free cash flow.

[Ross812]

"The New York Department of Financial Services is questioning Altisource Portfolio Solutions' practice of force-placed insurance, calling the transaction troubling, and saying that parent Ocwen Financial Corporation (OCN) may  be funneling as much as $65 million to Altisource even though his office has raised concerns about potential conflicts of interest between such entities."

 

"n an open letter dated Monday to Ocwen’s general counsel, Timothy Hayes, Lawsky raises a series of questions, alleging that there exists a complex arrangement related to force-placement that “appears designed to funnel as much as $65 million in fees annually from already-distressed homeowners to Altisource for minimal work.”"

 

I think this is what is being discontinued. Now if those fees are net, then this is about 1/3 of net profit. If the number quoted is revenues, then this is a much smaller amount.

 

Still this meshes with the financial statements. On the 10-q for 9 months ended Sep 2014 the related party insurance fees is about 45 million. That comes out to about 65 million per year which is what the regulator claimed. It'd be nice to know the profit margin on this business. Obviously if it's pure profit or like 80%, this is a bigger hit then if there are expenses associated with it.

 

This looks like close to pure profit. Company said the impact to earnings would be between 50c and 65c per quarter. This is 50-65M per year. 

[Ross812]

The question now becomes will they pay a fine for this or will OCN be responsible for a possible fine?

 

I'm looking at 108 to 122 in net income after the news. Operating margin falling from 20% to 11-12.5%.

 

If depending on the impact on all of this to OCN we are looking at FY '15:

 

Proforma rev @ 981M and growth @:

0% -  981M  net income -  117M    <- OCN not allowed to buy MSRs for '15

10%- 1080M net income -  129.6M

20%- 1180M net income -  141.6M

30%- 1275M net income -  153M      <- OCN business as usual

 

EPS $4.87 to $6.37 respectively

[scorpioncapital]

Still think it's quite strange the way they mention the profit impact. Say you lost a business segment, the profit impact is a discounted, ongoing sum not a fixed amount over 1 year. E.g. at 10x earnings, losing $2/share is a loss of $20/share and it's an annual loss of $2/share ongoing. Are they implying they will grow 33% in 2016 - which is the business profits lost?

[mvalue]

I think the run rate numbers a few are using are low - when you account for excess amortization I get a run rate of more like 170-175m after the insurance haircut.

[yadayada]

I seriously doubt it is pure profit. It is insurance, so sometimes they need to pay out?

 

Also I get earnings for last 9m of 167m$. So probably about 217m$ for 2014 (without that insurance operation cancelled) . I get this by adding back amortization to earnings.

 

So even if that insurance is a 80m$ hit , that is still 137m$ in earnings. So that is about 70$ per share if you think there is no growth. If it is 2.65$ per share, then that is still 8.35$ per share in earnings.

 

 

[Ross812]

I think the run rate numbers a few are using are low - when you account for excess amortization I get a run rate of more like 170-175m after the insurance haircut.

 

How do you figure? opex was rising at ~25% per year ex Equator amortization and expensed software costs. So normalized opex is somewhere around 120M right now. When does the 50M in other Opex come off? They paid 150M for Equator and seem to have amortized 100M so far. So one more year?

 

Is this why they quoted sub 50-65c per share till December 15?

 

They will charge 50M to Amortize the rest of Equator next year then this expense comes off. Meaning '16 earnings should be around 170-175M in stasis? The 50M amortization almost mirrors what they are losing on the insurance side.

[scorpioncapital]

If it has earning power and you didn't overpay, the amortization of intangible assets is one of the great tax breaks available to any company. In Canada I think we call it 'eligible capital property'. Nobody buys this stuff except for it's earning power...even if it's a big investment mistake, the government even allows you to depreciate it and deduct it from your other income after you've written it off in full and no longer even hold the property on your balance sheet.

 

 

 

[krazeenyc]

I seriously doubt it is pure profit. It is insurance, so sometimes they need to pay out?

 

Also I get earnings for last 9m of 167m$. So probably about 217m$ for 2014 (without that insurance operation cancelled) . I get this by adding back amortization to earnings.

 

So even if that insurance is a 80m$ hit , that is still 137m$ in earnings. So that is about 70$ per share if you think there is no growth. If it is 2.65$ per share, then that is still 8.35$ per share in earnings.

 

My understanding is that it is basically pure profit. They are not providing the insurance -- they are getting fees/commissions/kickbacks for the referral. Ocwen is not allowed to receive these kickbacks (in NY) -- so they moved this business to ASPS (this is what I found shady/smart/sneaky -- and was why I feared regulators would not allow the status quo to continue).  FWIW, I have no position in ASPS or OCN.

[yadayada]

Yeah I think your right. If you annualize insurance to related parties, that is about 2.6$ per share.

 

Altisource believes it is in the best interest of the Company and its shareholders to discontinue this line of business and continue to focus attention and resources on developing and delivering leading innovative technology-driven products and services for the real estate and mortgage markets that will provide benefits to consumers, lenders, originators and other participants.

 

From this I get that all their income from insurance will be gone? If that is the case, then based on last quarter, that is 160m$...

 

[Ross812]

Yeah I think your right. If you annualize insurance to related parties, that is about 2.6$ per share.

 

Altisource believes it is in the best interest of the Company and its shareholders to discontinue this line of business and continue to focus attention and resources on developing and delivering leading innovative technology-driven products and services for the real estate and mortgage markets that will provide benefits to consumers, lenders, originators and other participants.

 

From this I get that all their income from insurance will be gone? If that is the case, then based on last quarter, that is 160m$...

 

Where are you getting 160M? Are we reading the same press release you quoted?

 

They state 50-65c a quarter which is 12.5-16.5M per quarter or 50-65M per year. This coincides with the Lawsky allegation of 65M in mortgage insurance kickbacks.

 

Your last two posts indicated you haven't done your homework on ASPS yet. Have you read the posts in this thread, the annual report, or any of Glenn's blog posts about this company?

[scorpioncapital]

Why does the income drop for only 1 year - Oct 2014 to Dec 2015? What happens after?

[philly value]

Why does the income drop for only 1 year - Oct 2014 to Dec 2015? What happens after?

 

The way I am interpreting it, the statement "between October 2014 - Dec 2015" is only there because that is the range of dates that the company is currently giving guidance on. The loss of the income itself is permanent, but ASPS isn't going to make a statement about EPS impact in 2020. 

[yadayada]

The press release is kind of vague, it implies they will no longer be in insurance at all. And the reduction in income is also not clear. Why only for a one year period? Are they getting insurance back online after that?

 

However, given the uncertainties with industry-wide litigation and the regulatory environment, Altisource believes it is in the best interest of the Company and its shareholders to discontinue this line of business and continue to focus attention and resources on developing and delivering leading innovative technology-driven products and services for the real estate and mortgage markets that will provide benefits to consumers, lenders, originators and other participants.

 

Total insurance revenue is 43m last quarter. So annualized that would be ~160m$. But I guess the insurance services to non related parties will continue then? That is not very clear from that message.

[scorpioncapital]

Insurance services is certainly more than the program they are terminating

 

"Insurance services – Insurance services include an array of title insurance services, including pre-foreclosure, REO and refinance title searches, title insurance, settlement and escrow services. We also provide insurance program management, loss draft claims processing, insurance agency and brokerage services for lender placed and REO insurance companies."

 

Only the brokerage is gone.

 

The insurance service to related parties from what I can tell represents the discontinued operations. So in the end it is 60- 65m in revenue for 2014+ (of which all of it is profit).

 

[Ross812]

Why does the income drop for only 1 year - Oct 2014 to Dec 2015? What happens after?

 

Idk, the time range is strange. The only thing I could come up with is they are Amortizing the last 50M of Equator this year which means '16 on opex should drop by 50M.

 

I.e. Income is 172M, add in the the 50M amortized expense and you are at 222M take out 65M and your at 157M assuming 0% growth. Maybe a little lower assuming loss of the tax shield from the amortization. 

 

I think '15 should look about like this:

 

'14 net income @ 173M,  Rev @ 1050M

 

'15 revenues grow at 30% for all business segments ex OCN (OCN is 59% of Revenues) so we have a Rev GR of 12%.

 

Rev @ 1180M, net income @ 141M (12% margin ex Insurance including inflated amortization and software expenses).

 

'16 ex ocn would be:

 

Rev @ 1320M, net income @ 210M (16% margin with Equator amortization coming off)

 

What I am worried about right now is a possible fine coming for their forced insurance program. I was worried about OCN having to pay a fine, but it looks like it might fall through to ASPS. A 100M fine would wipe out all but 40M of ASPS earnings. On the bright side, ASPS could leverage the 40M and buyback cheap shares and will come back with 200M+ of earnings in '16.

 

I bought more @$58 today.