Investors launch Rocket IPO into high orbit

Rocket Companies raised $1.8bln in its initial public offering on Aug. 6

  
Screens display the logos of Rocket Companies (RKT), the parent company of Rocket Mortgage and Quicken Loans, in Times Square during the company's IPO on the New York Stock Exchange (NYSE) in New York City, New York, U.S., August 6, 2020.

Screens display the logos of Rocket Companies (RKT), the parent company of Rocket Mortgage and Quicken Loans, in Times Square during the company's IPO on the New York Stock Exchange (NYSE) in New York City, New York, U.S., August 6, 2020.

REUTERS/Mike Segar

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

NEW YORK - Don’t judge a company by one quarter’s results. It’s investing 101. Buyers of Rocket Companies’ stock-market debut on Thursday appear to have ignored the mantra completely.

Rocket – the largest U.S. mortgage lender by dint of being the parent of Quicken Loans – ended its first day as a public company worth almost $43 billion. That values the Detroit-based lender founded by Dan Gilbert at 48 times last year’s earnings. JPMorgan, by contrast, trades at some 9 times last year’s profit.

The apparent answer to this yawing discrepancy lies in Rocket’s preliminary second-quarter results, inserted into an updated regulatory filing last month. The company reckons its revenue was at least $5.2 billion, slightly more than the top line for all of last year, while earnings of some $3 billion equate to more than three times what it raked in for the whole of 2019.

Factor in these stellar numbers and Rocket was by mid-morning Friday trading at a more humdrum 10 times earnings over the 12 months to June. Problem solved? Not so fast. This year’s second quarter was the best year for mortgage lending since 2003, according to Inside Mortgage Finance, when low interest rates and the end of a recession prompted waves of refinancing and home sales. Even the subprime-lending boom that led to the 2008 financial meltdown could not best that year’s figures.

It’s hard to see the U.S. housing market entering a long boom cycle, though. Interest rates have been exceptionally low for most of the past decade, so a refinancing rally is likely to be short-lived. There may be more fuel in city dwellers deciding to move to the suburbs thanks to the pandemic, but that may be limited by an economy reeling from the virus lockdowns.

That’s not to ignore Rocket’s underlying strength. It weathered past mortgage crises, has developed technology that removes many of the bureaucratic headaches of applying for home loans and is growing faster than many banking and non-banking peers alike. But chances are the second quarter was part of an industry anomaly that may not last too long, meaning gravity may soon bring its valuation back down to earth.

CONTEXT NEWS

- Rocket Companies, the parent of Quicken Loans, raised $1.8 billion in its initial public offering on Aug. 6. The mortgage lender sold 100 million class A shares at a price of $18 each, lower in both instances than its initial intention. It had hoped to sell 150 million shares and raise as much as $3.3 billion based on the top of the original range of $20 to $22 a share.

- Shares closed at $21.51 each, valuing Rocket just shy of $43 billion.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Jennifer Saba and Amanda Gomez)

© Reuters News 2020

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