Ocwen Financial Corporation(OCN) reported fourth quarter 2011 earnings of 8 cents per share, substantially missing the Zacks Consensus Estimate of 29 cents. This also compares unfavorably with the prior-year quarter earnings of 9 cents.

Ocwen’s net income for the reported quarter stood at $9.7 million compared with $9.9 million in the year-ago quarter.

For 2011, Ocwen recorded net income of $78.3 million or 71 cents per share versus $38.0 million or 36 cents per share in 2010. However, earnings per share were significantly below the Zacks Consensus Estimate of $1.05.

During the year, Ocwen completed the acquisition of Litton Loan Servicing, a unit of Goldman Sachs Group Inc. (GS) for $263.7 million. Also, the company announced a deal to acquire Saxon Mortgage Services Inc., a mortgage subsidiary of Morgan Stanley (MS). The transaction is anticipated to close in the first quarter of 2012.

The result in the quarter benefited from a surge in total revenue. However, higher operating expenses, higher interest expenses as well as reduced interest income were the dampeners.

Quarter in Detail

Ocwen’s total revenue in the fourth quarter surged 38.3% year over year to $156.6 million. The improvement was mainly attributable to a 43.8% rise in servicing and sub-servicing fees, which was partly offset by 15.6% decrease in process management fees and 26.2% drop in other revenues. Total revenue was ahead of the Zacks Consensus Estimate of $155.0 million.

For full year 2011, total revenue stood at $495.9 million, up 37.6% from $360.4 million in 2010. Total revenue also surpassed the Zacks Consensus Estimate of $494.0 million.

Operating expenses rose 43.0% year over year to $90.5 million in the reported quarter. The main reason behind this rise was the drastic increase in compensation and benefits costs. Apart from this, expenses related to amortization of mortgage servicing rights, servicing and origination costs as well as professional services expenses were also high during the quarter. However, these were partly mitigated by a fall in occupancy and equipment costs.

Interest income declined 5.1% year over year to $2.23 million, while interest expenses leaped 27.4% year over year to $45.8 million.

Balance Sheet and Other Updates

As of December 31, 2011, Ocwen recorded cash of $144.2 million compared with $127.8 million as of December 31, 2010. Debt securities totaled $82.6 million as of December 31, 2011, in line with the figures as of December 31, 2010.

Moreover, in the reported quarter, Ocwen completed a public offering of 28,750,000 shares of common stock that resulted in net proceeds of $354.4 million. This amount will be utilized to support pending and potential future acquisitions. Further, the company also secured an additional $200 million borrowing commitment on the Senior Secured Term Loan, which is expected to result in proceeds of $194 million to support pending acquisitions.

During the fourth quarter, Ocwen completed 18,663 modifications (including 16% in Home Affordable Modification Program), up nearly 18.5% from the prior-year quarter. For 2011, the company completed 76,205 modifications.

Our Viewpoint

Although the near-term outlook remains cautious owing to market volatility and subprime MSR market contraction, Ocwen remains committed to new business acquisitions and loan modifications. These will likely convert into increased profitability over time. Additionally, the company’s acquisition of Litton and Saxon would benefit its financials over the long term.

Furthermore, with the ongoing deterioration of home price, Ocwen might bag even more opportunities to acquire distressed servicing portfolios at low prices.

Ocwen currently retains a Zacks # 2 Rank, which translates into a short-term ‘Buy’ rating. Also, considering the fundamentals, we maintain our long-term “Outperform” recommendation on the stock.

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