Why Rocket Companies Stock May be Poised to Blast Off

Rocket Companies (NYSE:RKT) stock exploded following its August 6^th IPO. Shares of the online mortgage lender nearly doubled a month after its market debut amid a hearty investor appetite for fresh e-commerce offerings.

Since then the stock has come back down to Earth as the usual IPO euphoria died down and traders rotated into the latest hot flavors of the month. Now trading just, a couple bucks shy of its $18 introductory offer, Rocket appears all but forgotten.

But this may not last long. The fundamental growth story remains strong and may have even strengthened since the Rocket joined the NYSE. A Millennial-friendly technology platform, warming U.S. housing market, and historically low mortgage rates suggest Rocket Companies now has the ammunition for a second launch.

What is Rocket Companies' Background?

Although Rocket may seem like another upstart FinTech company, its roots actually go back to 1985 when it was founded as Rock Financial. Since its early days as a traditional mortgage company, Rocket has evolved into the country's largest residential mortgage lender by as CEO Jay Farner put it, "taking the road less traveled". It operated RockLoans.com before morphing into Quicken Loans and then becoming the modern mortgage brand Rocket Mortgage.

Rocket launched the world's first fully online mortgage process five years ago and the growth since has been impressive. Last year it closed $145 billion worth of mortgages—and has already surpassed that figure in 2020 with one quarter still left to report. Now with nearly 30,000 lending institutions as part of its platform, Rocket looks ready to enter the next decade of growth.

Armed with its simple, convenient online mortgage tools, Rocket's technology appeals to younger generations such as Millennials who prefer to conduct most business online. The current economic backdrop brought upon by the pandemic has only accelerated consumers comfort with performing banking activities online.

Today, Rocket is more than just a mortgage lender. It is a collection of different companies. It has satellite businesses in auto financing and personal lending. It even operates a small digital media company called Core Digital Media which is focused on social and display advertising for the mortgage, insurance, and education sectors.

How has Rocket Companies Performed Recently?

Last month Rocket announced third-quarter results that confirmed the strength of the brand. Mortgage volumes increased 122% to a record $89 billion and profits soared more than 500% to $3 billion. Most impressively, Rocket helped more people than ever before in its history buy and refinance homes last quarter while increasing its industry-leading profit margin.

This all sounds rosy, so why hasn't Rocket taken off? Well, much of the market's reluctance relates to the company's recent debt issuance. To refinance $1.25 billion of debt due 2025, it recently issued $2 billion of senior notes due 2029 and 2031 with the remainder to be used for the standard "general corporate purposes". This saved the company $25 million in interest expenses but raised its debt-to-capital ratio to almost 79%.

But investors need not fret too much about this move. Over time Rocket will likely put the funds to good use to enhance its technology and continue to grow the business.

Moreover, somewhat lost in the shuffle of last quarter's report was the company's authorization of a $1 billion stock buyback program. With the shares now arguably well undervalued, it wouldn't be surprising to see management soon pull the trigger on its repurchase program.

Is this a Good Time to Buy Rocket Companies?

Last week the average U.S. 30-year fixed mortgage rate set another low at 2.71%. Given the weakening employment landscape and accommodative Federal Reserve, rates are likely to remain low for the foreseeable future. This will make refinancing and home buying as attractive as ever especially as vaccine distribution potentially paves the way to a healthier economy.

This trend falls right into the lap of Rocket's tech-driven mortgage platform. Look for more and more financial institutions and consumers to gravitate towards the Rocket platform in 2021 and beyond.

Next quarter management is forecasting closed loan volume growth of $88 billion to $93 billion which represents 78% growth at the midpoint. Yes, this represents a deceleration from the last quarter, but more importantly, the full year results will be excellent. And looking into next year, margins and growth should remain strong.

So, what does the Street think about Rocket these days? The seven analysts that have chimed in on the stock over the past 30 days have had mostly positive views. Four have reiterated or initiated 'buy' ratings while three have maintained more cautious 'hold' ratings. Price targets amongst the group of seven range from $23 to $30.

At 6x forward earnings, this may be the lowest valuation that we see on Rocket for some time. If investors see this stock trading below $20, they should consider building a position. Rocket Companies appears to be refueling for a major launch.