Flagstar Looks Undervalued, But Volatility And Modeling Risk Also Look High

Flagstar Bancorp (FBC) is not a typical bank. While there is a relatively straightforward community bank here, there is also a large national mortgage business, and the outsized volumes and volatility here make Flagstar a more challenging bank to value. Management is bullish on the prospects for strong ongoing volumes for mortgage refinancing early in 2021, but at over 55% of fourth quarter revenue and two-thirds of fourth quarter pre-provision profits, any deviations in those notoriously hard-to-model business category will have an outsized impact on Flagstar’s results.

I’m expecting gains on loan sales (the mortgage business) to decline by about 30% in 2021 and 2022, but tangible book value could still grow 30% from the end of 2020 to 2022 under that scenario, and as mortgage activity wanes, the bank’s asset sensitivity should kick in with an economic recovery driving higher rates in a couple of years. If a normalized long-term core earnings growth rate in the 6% range is reasonable, Flagstar offers double-digit annualized appreciation potential from here, and the shares should trade closer to $50.

 

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Flagstar Looks Undervalued, But Volatility And Modeling Risk Also Look High