Lender Processing Services has positioned itself as a mortgage technology and service provider for all weather, yet in its first year as an independent company it's proven to be particularly adept at storm drainage.
"The story for LPS right now is this explosive foreclosure market, and what happens when foreclosures slow down," said John Kraft, a research analyst for D.A. Davidson & Co. "That's the million-dollar question for LPS."
LPS, which was spun off from Fidelity National Information Services in July 2008, reported revenue of $613.2 million for the second quarter of 2009, an increase of 35.3% year over year. Revenue in its default services division was almost $300 million, or about 52% year-over-year growth, and by some counts the company has grabbed more than a 50% share of the U.S. foreclosure services market.
"There's a reason why the stock is cheap relative to growth," Kraft said (it was trading at about $35 per share in mid-August). LPS' business model is balanced, there are still concerns in the market that its growth may not be sustainable once foreclosures die down, he said.
Jeffrey Carbiener, LPS' president and chief executive, said he isn't worried. He said the company's business model is built to tap into all parts of the mortgage market cycle.
"We provide services across the whole spectrum. When we're down in origination, we're up in foreclosures," Carbiener said. Additional growth and opportunity in the past year have come from helping institutions adjust their information technology infrastructure to manage regulatory change and an early year spike in refinancings, he said. And the LPS desktop workflow management product, which manages foreclosures, has been modified to help lenders handle loss mitigation, he said.
Nat Otis, an analyst for KBW Inc.'s Keefe, Bruyette & Woods, agrees that LPS' business model is balanced, but he said the company probably won't have to worry about the foreclosure market drying up anyway. "We're talking about foreclosures peaking in mid to late 2010, with a pipeline that goes into 2011," he said.
Because LPS is relatively new, it can benefit from foreclosures in the past year while making contacts with key institutions for when the origination market does recover, Otis said. Bank executives "gravitated toward the default and foreclosure side, but realized LPS is not just that," he said. "There are sources of growth elsewhere."