UPDATE: Compass Point Reiterates On Walter Investment Management As Margin Pressure Will Continue Into 2015

In a report published Monday, Compass Point analyst Kevin Barker reiterated a Sell rating on Walter Investment Management (NYSE: WAC), but lowered the price target from $23.00 to $18.00.

In the report, Compass Point noted, “We reiterate our Sell rating and lower our price target on WAC to $18 from $23 following the 2Q14 earnings release. The second quarter earnings release was in-line with our expectations as a bounce back in amortization expense pushed servicing margins lower, origination earnings benefited from a larger HARP-eligible servicing portfolio, and the company guided to lower earnings in the back half of 2014. However, the vast majority of the 2Q14 earnings report was driven by HARP originations and there are a series of regulators investigating WAC's servicing practices.

"We expect the expense associated with addressing regulators concerns (as we have seen from other servicers) and the impact of refi burnout on origination revenue to make it difficult for WAC to sustain GAAP earnings above $0.50 per share over the next several quarters. Due to these pressures, we believe the consensus estimates for FY15 remain too high at $4.94 per share and do not reflect the true economic returns to shareholders. Our estimates for ‘adjusted' operating earnings as reported by WAC in FY15 is $3.14 (apples to apples to street estimates), but on our interpretation of operating earnings, we estimate $2.55 for FY15. Our $18 price target is 7x our $2.55 estimate. We are adjusting our FY14E operating EPS to $3.50 from $2.83 due to this quarter's results and elevated gain on sale revenue. Our FY15E operating EPS falls to $2.55 from $3.26.”

Walter Investment Management closed on Friday at $25.98.