Rocket Companies (RKT) Q2 Earnings

Investment Analysis Clubs Saul’s Investing Discussions
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Revenue $5.04 Billion Q2 2020 vs $938 million Q2 2019
Analyst estimate: $3.91 Billion

Net Income $3.5 Billion vs $54 million loss Q2 2019

Q2 adjusted net income: $2.85 billion vs $260 million Q2 2019

I jumped on their recent IPO last month because of the housing market booming but more importantly because of the low interest rates. These rates are going to stay low for quite awhile and Rocket has already seen the huge impact. I myself actually took advantage of the situation and refinanced my house as well. I know this is not an SaaS company that we typically follow but it would be worth a look into when there are numbers being put up like this. Stock fell 5% after hours and I grabbed more.

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I took a position before earnings yesterday and the numbers they are posting are insane. I have a 2% position for now and would like to expand in the near future.

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Insane numbers and they said that Q3 will even be better!

I read somewhere, can’t locate it again, that earnings for the quarter were $1.44/share! Research it yourself. I could be mistaken, although I did see it.

Those numbers certainly are repeatable, given that the Fed just announced that interest rates are staying near zero for the foreseeable future. Mortgage and refinance demand will remain strong for quite some time,my opinion!

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Rocket Companies, Inc. (RKT)
Industry: Mortgage Finance

Nassim Nicholas Taleb rates the financial industry “Bad Black Swan Prone.” It was the financial industry that crashed the market in 2007/8 and based on mortgages. It’s playing with fire. Additionally, housing is a cyclical industry unlike our much more stable SaaS and healthcare businesses.

I have a 2% position for now and would like to expand in the near future.

At 2% you need 50 stocks in your portfolio, the opposite of concentration. Would you take a 20% position in RKT? If not, why take a position at all?

Not for me.

Denny Schlesinger

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Insane numbers and they said that Q3 will even be better!

So why the dip after hours? Doesn’t make a lot of sense… let’s see what happens when the market opens.

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Market manipulation, shake off weak hands…

The CFO mentioned “seasonality” for Q4 or so, must read the transcript for that words…

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A 2-4% starter position is pretty standard on here. Even Saul does this when he takes a new position. Why on earth would someone just buy up 20% of their portfolio in one company in one day?

And yes it is in the housing industry. What I was saying is that the Fed is going to keep the rates low for a long time and chip away at inflation. Their main concern is getting the economy back to where it was in February but that will take years if not a decade. With mortgage rates staying at all time lows for possibly years, RKT is a good 2-3 year investment in my opinion.

I’m long ZM, CRWD, DDOG, SE, TWLO, DOCU, PINS, FSLY, NET

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A 2-4% starter position is pretty standard on here. Even Saul does this when he takes a new position. Why on earth would someone just buy up 20% of their portfolio in one company in one day?

Sorry, I was not clear enough, a 2% starter position is fine, that was not my objection. I was thinking longer term. If you have a concentrated portfolio of, say, 5 stocks then your average position will be 20%. If RKT is a high conviction position then it will build up to 20% or better in time. That was my point of reference, would you be willing to put 20% of your portfolio in RTK at any time?

What I was saying is that the Fed is going to keep the rates low for a long time and chip away at inflation. Their main concern is getting the economy back to where it was in February but that will take years if not a decade.

I see relying on the Fed as a weakness because despite all claims to the contrary, it is a political institution. Betting on the Fed is not the same as betting on markets. Most of our stocks are much less influenced by government than housing which is seen by government as a social issue to be manipulated same as healthcare. You might object that Teladoc and Livongo are healthcare so why do I have such a large position? Many people see these companies as healthcare but I don’t. Their clients are healthcare payors who are looking for ways to save money by promoting more rational ways to deal with health. Their mission is to improve the functioning of the healthcare market.

I’ve been through two crashes 2000 and 2007/8 and while my portfolio survived it took heavy losses because some of my companies were not “sturdy.” Several went bankrupt and could not bounce back. Based on an essay comparing sturdy vs. efficient portfolios I decided not to have any high risk positions which is the reason I no longer invest in insurance or any business that has credit exposure, credit risk.

Denny Schlesinger

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Denny,

Rocket resells 99% of the loans they originate. They don’t keep the loans on their books. They sell the loans but keep servicing them which they are paid for.

20% or so of rockets revenue are income from servicing loans. The rest would be loan originations.

This has little risk of going bankrupt and has already survived the 2008 recession. They are just cyclical so it doesn’t do any good to get excited about the ultra low PE ratios this company is likely to keep.

But still $3 billion income a quarter is real money for a $50 billion company. Interesting Stock but I have more interest elsewhere.

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I am taking a second look at RKT, no position yet. The Q2 numbers were astounding. Like captainccs, I have stayed mostly clear of financial stocks because I really struggle to read their financial statements and they are very interest and housing sensitive. Gross Margins are small with associated big volumes. I also clear of energy, commodities, and airlines stocks. There are just too many factors outside of these companies control. One big factor in the SaaS high growth stocks on this board is that they are somewhat immune to the cyclical economy. These SaaS companies are the picks and shovels of 2020, not the gold miners. And you remember the gold miners by and large did not fair well.

RKT does have an internet platform that I would assume is a SaaS cloud. Rocket executives on Wednesday attributed the company’s success in the second quarter in part to their platform’s ability to quickly scale up and meet demand. By the end of this year, Rocket has said it aims to be able to process $40 billion in loans per month. A key feature of RKT is that they have a digital presence to service the loans and can process them faster. A key strategy for their high growth is that banks are restricted per 2009 regulation in the their lending debt load. And RKT is not a bank and has no such restriction. This is a pink flag for me except they are for now holding less than 10% of their loans.

The cause of the 2008 crash and recession was because of an exploding housing market driven by low interest loans. The was amplified into a bubble by the subprime credit market that fueled the low interest loans for people who really were not qualified to buy a house. A financial and housing crash were inevitable. This current environment is similar in that there is a lot of liquidity sloshing around right now due to the Federal Reserve Board who want to mitigate the Covid downturn and Congress who wants to give a lot of money away. In other words very low interest mortgages. This recession is different in that buyers are much more qualified these days and I believe the subprime market is tightly regulated now. Certainly Fannie Mae seems to be behaving. We also still have a strong economy in some sectors for some businesses with people working remote. And a lot of people moving out of the major cities. This trend should continue for the next year.

Both my kids just completed refi’s for their homes with Quicken Loans (now Rocket) this early summer. I can tell you my daughter’s loan approval was no cake walk even though she has good equity. She had lost her job due to Covid and just now is re-employed. So RKT is not giving out loans to just anybody.

RKT is forecast at a 20% net operating profit. They are making money on origination services, title insurance, and loan servicing. They are also holding some of the mortgages which gives me pause. Given this kind of shorter term 1 year potential and no sustained reoccurring revenue, RKT probably does not belong on Saul’s broad.

Here is a yahoo finance RKT business explanation.
https://finance.yahoo.com/news/investor-guide-rocket-mortgag…

Here is a seekingalpha article just posted that describes the Q2 and QoQ comparisons.

https://seekingalpha.com/pr/17972348-rocket-companies-announ…

Second Quarter Highlights:

Closed loan origination volume of $72.3 billion increased 40% compared to the first quarter of 2020 and 126% compared to the second quarter of 2019
Total net revenue of $5.0 billion increased 269% compared to the first quarter of 2020 and 437% compared to the second quarter of 2019
Net rate lock volume was $92.0 billion, an increase of 64% compared to the first quarter of 2020 and 170% compared to the second quarter of 2019
Gain on sale margin was 5.19%, up from 3.25% in the first quarter of 2020 and 3.22% in the second quarter of 2019
Net income was $3.5 billion compared to net income of $97 million in the first quarter of 2020 and a net loss of $54 million in the second quarter of 2019
Adjusted revenue of $5.3 billion increased 152% compared to first quarter 2020 and 300% compared to second quarter 2019
Adjusted net income was $2.8 billion, an increase of 335% compared to first quarter 2020 and 995% compared to second quarter 2019
Adjusted EBITDA of $3.8 billion grew 317% compared to the first quarter of 2020 and 868% compared to the second quarter of 2019

-zane

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Great write up Zane. I listened to the CEO the other day as he said Q3 is going to be even better. He also elaborated on his statement on their earnings call about the seasonal slowdown during Q4. He pretty much summed it up by saying he had to say that because that’s usually what happens during Q4 and the holiday season but these are not normal times. And with the rates remaining low and the demand high he wouldn’t be surprised if Q4 was big as well.