Ocwen Financial Corporation (OCN) reported fourth quarter 2010 earnings of 9 cents per share, which missed the Zacks Consensus Estimate of 16 cents but was in line with the prior-year quarter result.

The results for the reported quarter included one-time pre-tax charges of $17.5 million related to the HomEq acquisition and $1.2 million of interest expense related to the partial prepayment of loan.

For full year 2010, the company reported adjusted earnings of 36 cents per share, which lagged the Zacks Consensus Estimate of 43 cents.

Ocwen’s results were affected by operating costs hike, higher interest expense and interest income decline, which were partially offset by a rise in total revenue.

Quarter in Detail

Ocwen’s net income in the quarter improved to $9.9 million from $9.4 million in the year-ago quarter. In fiscal 2010, net income was $38.0 million versus $0.3 million in the prior year.

Total revenue soared 55.7% year over year to $113.3 million. However, total revenue was slightly behind the Zacks Consensus Estimate of $114.0 million. The year-over-year improvement in total revenue was mainly attributable to a 64.2% rise in servicing and sub-servicing fees and 109.5% increase in other revenues, which were partly offset by a 1.4% fall in process management fees.

For full year, total revenue tumbled 5.3% to $360.4 million from $380.7 million in 2009, but remained slightly ahead of the Zacks Consensus Estimate of 360.0 million.

Operating expenses increased 73.3% year over year to $63.3 million. The hike was mainly due to a substantial rise in expenses related to compensation and benefits, occupancy and equipment as well as professional services. However, it was partly offset by a drop in servicing and origination costs.

Interest income fell 1.0% year over year to $2.35 million. Interest expense, however, rose substantially year over year to $35.9 million.

As of December 31, 2010, Ocwen recorded cash of $127.8 million compared with $90.9 million as of December 31, 2009. Debt securities totaled $82.6 million as of December 31, 2010 in comparison with $95.6 million recorded as of December 31, 2009.

During the quarter, Ocwen completed 19,999 modifications (including 20% in Home Affordable Modification Program), which exceeded the upper end of the company’s guidance of 16,000−19,000 modifications.

Our Viewpoint

Although near term outlook remains cautious due to market volatility and a contraction in subprime MSR market, Ocwen remains committed to cost containment, new business acquisition and increase in loan modifications. These will expectedly convert into increased profitability gradually.

Ocwen’s close competitor – Radian Group Inc. (RDN) had reported a fourth quarter 2010 loss of 79 cents per share, significantly higher than the Zacks Consensus Estimate loss of 63 cents.

Ocwen currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we are maintaining our Neutral recommendation on the stock for the long term.

 
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