Is UWM Holdings a Buy After Announcing the Termination of a Secondary Offering?

UWM Holdings Corporation (UWMC), in Pontiac, Michigan, is the largest wholesale mortgage lender in the United States and is the publicly traded indirect parent of United Wholesale Mortgage, LLC. On November 18, UWMC’s secondary offering of Class A stock and concurrent share repurchase was terminated by its principal shareholder SFS Holding Corp. 

Regarding the termination of the offering, company Chairman and CEO Mat Ishbia said, “As the principal owner of SFS, I was willing to sell a percentage of our ownership in UWM at less than what I think to be fair value because we were advised that increased float in the public market would be beneficial for the UWMC shareholders, including its largest shareholder, SFS. I was also willing to have SFS sell additional shares to the company at the same time and priced to make good on our buyback commitment and reduce the number of shares outstanding without also decreasing the public float. Unfortunately, while there was more than enough demand from potential investors, the overall market conditions were such that the prices offered were not at levels that I will entertain.”

UWMC’s public float was expected to increase 50% following the secondary offering, substantially lowering its EPS and ROE. Therefore, the cancellation of this offering has evoked a positive reaction from investors. Shares of UWMC have surged 12.3% in price since November 18 to close yesterday’s trading session at $6.93. 

However, the decelerating growth of the mortgage industry amid rising housing prices raises concerns regarding the UWMC’s growth prospects in the near term.

Here is what could affect UWMC’s performance in the near term:

Rising Home Prices due to Surging Inflation Rate

Accelerating housing prices are raising concerns regarding the formation of a potential housing bubble in the United States. Median housing prices prices have risen 30% over the past decade. In comparison, per capita income has increased 11% over the last 10 years. Over the past two years, the median house price has increased 23.4% year-over-year to $363,000 (as of June 2021).

Mortgage rates have increased substantially as a result, thereby discouraging potential buyers. Total mortgage application volume declined 2.8% sequentially in the second week of November, while the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances rose 40 basis points. Mortgage applications to purchase a home fell 6% year-over-year in the second week of November.

Poor Growth Prospects

With rising interest rates and decelerating buyer activity, analysts expect UWMC’s earnings to decline in the coming months. Analysts expect the company’s revenues to decline 44.2% year-over-year to $664.11 million in its fiscal first quarter, ending March 2022. A $0.19 consensus EPS estimate for the next quarter indicates a 43.1% decline from the same period last year. In addition, the Street expects the company’s EPS to decline at a 14.8% rate per annum over the next five years.

POWR Ratings Reflect Bleak Prospects

UWMC has an overall D rating of D, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of D for Value and Sentiment. It is currently trading at 4.49x forward EV/Sales, which is 41% higher than the 3.19x industry average, in sync with its  Value grade. Furthermore, the company’s poor earnings growth estimates justify its Sentiment grade.

Of the 53 stocks in the Consumer Financial Services industry, UWMC is ranked #47.

Beyond what we have stated above, one can view UWMC ratings for Growth, Stability, Momentum, and Quality here.

Bottom Line

The rising interest rates and a seasonal decline in housing market activity during the holiday season are expected to maintain pressure on UWMC. While the housing market is expected to stabilize over the long term, poor analyst sentiment and a lofty valuation we thin make UWMC best avoided now.

How Does UWM Holdings (UWMC) Stack Up Against its Peers?

While UWMC has a D rating in our proprietary rating system, one might want to consider taking a look at its industry peers, Regional Management Corp. (RM) and OneMain Holdings, Inc. (OMF), which have an A (Strong Buy) rating.

UWMC shares were trading at $6.85 per share on Tuesday afternoon, down $0.02 (-0.29%). Year-to-date, UWMC has declined -45.85%, versus a 25.94% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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