Editor’s Note: This article was updated on May 17, 2021, to correct the dividend.
UWM Holdings Corp (NYSE:UWMC), the parent for United Wholesale Mortgage Corp., looks like a value bargain here. My estimate is that UWMC stock is worth at least 36% higher, or $10 per share, given its low price-to-earnings ratio (P/E) and its attractive dividend yield.
On May 10, UWM released its first-quarter earnings showing that it made $665.3 million in adjusted net income during the quarter.
The company also said that it made a “total gain margin” of 2.19%.
We can use these numbers, plus its guidance going forward, to estimate its earnings for the year. In addition, we can compare it to last year’s original slide presentation, where it provided its own 2021 forecasts.
Estimating UWM’s Earnings
The total gain margin is a way of measuring revenue to the company from its loan production volume. It essentially means that 2.19% of the total $49.094 billion in loan volume in the quarter turned into $1.074 billion in loan fee revenue. In addition, UWM makes money on servicing rights. But the land volume fees are the vast majority of its $1.189 billion in quarterly revenue.
The $665.3 million in adjusted net income represented 55.9% of total revenue. This shows how incredibly profitable the company really is. Another way to measure this is as a percent of total loan volume. For example, $665.3 million in adjusted net income was 1.355% of total loans closed during the quarter.
Therefore, using its guidance for Q2 we can project out earnings for the year. The company said this:
“We anticipate second quarter production to be in the $51-$55 billion range, with expected gain margin between 75 and 110 bps.”
Let’s assume it will do $53 billion. Therefore, assuming a 100 basis-point margin, revenue would be $530 million. That is significantly below $1.074 billion this past quarter. However, after adding in $125 million in servicing revenue, the total revenue will be $655 million.
Then, using a 60% net income margin (slightly higher than last quarter), the adjusted net income will be $393 million. Let’s call it $400 million. Projecting that works out to $1.2 billion for the next three quarters, plus the $655 million in Q1. That works out to $1.855 billion for 2021.
Note that in the slide presentation last September, on page 44, the company projected $1.69 billion in adjusted net income for 2021. This means our very conservative projection for $1.86 billion is still higher.
What to Do With UWMC Stock
As there are about 1.605 billion shares outstanding, the adjusted EPS will be $1.16 per share. At the recent price of $7.38, this puts UMVC stock on a forward P/E of just 6.4 times forward earnings. That is very cheap.
My estimate of $1.16 is close to analysts’ estimates, as seen by Seeking Alpha, of $1.14 per share. They also estimate $1.23 for next year. That puts UWMC stock on a forward P/E of just 6 times earnings.
I believe a more appropriate valuation is 8 times earnings. That puts the value at $9.84, or roughly $10 per share. This is a potential 36% gain for UWMC stock.
Another reason is UWM’s new buyback program. On May 11, UWM said it would repurchase up to $300 million of its shares over the next 24 months. This is a sort of dividend to shareholders.
With its $12.8 billion market cap, the $300 million represents a 2.34% buyback yield to shareholders (i.e., $300 million/$12.8 billion) over two years. This is also worth 1.17% annually, or 13.6 cents per share.
Add that to the 5% dividend yield (i.e., 10 cents quarterly divided by $7.98). So the total yield, as I call it, is worth about 6.7% (i.e., 53.6 cents divided by $7.98). At $10 per share, the total yield is 5.36%, a more appropriate valuation.
To learn more, you can check out my analysis of total yield in my Total Yield Value Guide (see below).
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.