Description

Corelogic $41

·        Asset light, cash generative business trading at 10x forward EV/EBITDA and 13x forward earnings and free cash flow

·        Mortgage issuance likely near bottom

·        High quality businesses with recurring revenue and low customer attrition

·        Relatively low disruption risk

·        Plausible M&A target

·        Lower risk way to bet on stable to improving new housing market

Corelogic was written up in 2015 and again in 2017. The stock fell subsequent to the last writeup on weakness in mortgage issuance and restructuring costs, although it has recently recovered. Even with the share price recovery, I think it’s a good time to begin a position in the name as mortgage issuance expectations are now quite low, and refinancing volume has fallen to what are likely floor levels, leaving new home purchases as the primary driver of mortgage volume. With new home purchases now at levels roughly equal to new home formation, purchase volumes should provide more earnings stability going forward for the company.

For perspective, refinance now represents roughly $400 million of a $1.6 trillion issuance market, down from as high as 71% of a $2 trillion market in 2012 ($1.5 trillion refi issuance). That represents its lowest dollar volume since 2000, when the population was 42 million, or 13%, lower. Further, with long term treasury rates having largely flat lined for six years, most of the rate-driven refinancing should have been flushed out of the market and we should be at levels where refi is more driven by credit changes, desire for cash, desire to change term or switch from floating to fixed, etc. At 25% of the total issuance market, refinance is roughly at the trough levels seen at prior lows in 1990 and 2000. Note that 1990 was the absolute worst year over the last three decades with only $70 million of issuance, or 15% of total volume, as rates rose while economic growth slowed. That combination appears unlikely to recur at present.

In addition, 2020 should be a good year from an expense standpoint, due to restructuring actions taken over the last couple years.

Finally, the CLGX continues to build out its non-mortgage related businesses, providing better long-term diversification and growth. The company targets a goal of 50% non-mortgage related business over the next several years. Bolt on acquisitions (like its recent purchase of Symbility) are broadening its reach beyond traditional mortgage into P&C insurance and international markets. Its is worth noting that even during a tough mortgage market over the last few years, earnings from the company’s property intelligence (PRIM) unit have grown, offsetting weakness in the underwriting division, which is more tied to mortgage issuance. As of 1Q 19, PRIM represented 42% of total company EBITDA, and between somewhat faster growth and bolt-on M&A, could inflect to more than half of company earnings over the next several years.

Background

Corelogic provides data to real estate lenders and insurers, as well as related business interested in real estate analysis. Key information categories include property tax records, flood zone determinations, credit and income verification, and property appraisal. The company also provides realtors with MLS listings which it claims are more detailed than those generally available on the web.

The businesses are classed into the Property & Risk Management Solutions group (PIRM), which has limited dependence on mortgage issuance and represents 42% of EBITDA. The larger division, Underwriting and Workflow Solutions (UWS) represents the balance and is highly correlated with mortgage issuance volumes.

While there are competing products in each of the company’s real estate data divisions, the breadth of product is unique, and has led to relatively low customer churn and barriers to entry. Over time, and adjusting for annual variability in mortgage issuance, management believes the business can support mid-single digit top line growth. While this is a few points lower than the growth targeted by information solution providers like Equifax and Transunion, CLGX trades much cheaper than these names and has somewhat higher cash conversion (at least than Equifax), with roughly half of EBITDA, or all of net income, converting to free cash flow.

The company decided to exit some legacy businesses last December, including some mature loan origination software and its platform for managing loan defaults. These exits will reduce revenue modestly and create some one-time costs, but the units were relatively small contributors to the company’s earnings.

The company’s strong free cash flow allows it to steadily buy-in complementary platforms. Its recent acquisition of the remaining 72% traded shares of Symbility is a good example of a tuck-in that will broaden its offering to insurance companies. Symbility provides cloud based insurance claim management tools. The acquisition should add roughly $40 million of revenue, probably at somewhat lower EBITDA margins but with higher long-term growth than CLGX’s legacy businesses.

Corelogic’s businesses are cash generative, with 50% of EBITDA typically converting to free cash flow. The company is targeting a 30% EBITDA margin for 2020, based on a ‘normal’ mortgage issuance market of $1.7 trillion. Assuming the company achieves modest 2020 revenue growth and approaches its 30% margin target implies 2020 EBITDA of roughly $500 million of EBITDA on $1.68 billion of revenue. At 50% free cash flow conversion, that implies roughly $250 million of free cash flow, or $3.10 per share.

Longer term, CLGX should be a relatively low risk way to participate in stability of the new home purchase market, as well as growing interest in real estate data solutions.

Catalyst

Improving mortgage issuance, effective capital deployment