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Deutsche Bank upgraded Rocket Companies (RKT, Financials) to buy from hold and reaffirmed its $16 price target following the company's announcement of a proposed $9.4 billion all-stock acquisition of Mr. Cooper Group (COOP, Financials), a move the bank said could significantly expand Rocket's market share and boost earnings.
Deutsche Bank analyst Mark DeVries gave the company a raise, citing the strategic purchase as a step toward Rocket's goal of gaining 20% of the U.S. mortgage borrowing market by 2027.
DeVries said in the report that the deal should create a lot of benefits and make Rocket's revenues more stable across economic cycles. DeVries thought that Rocket's earnings per share could rise by 38% by 2027 as a result of the purchase. Adding Mr. Cooper's service activities could help Rocket's income during times when it doesn't have many mortgage originations, which could help keep earnings stable over time. Even though Rocket's shares are selling at a price-to-earnings ratio of 64.1, they have gone up 18.25% so far this year.
Deutsche Bank thinks that Rocket's price will go up 27% from where it ended on Tuesday, to $16. The bank said that Rocket's platform could get even better if interest rates went down. This is because lower rates could make Mr. Cooper's loan recovery rates higher and increase income synergies. The people in charge of Rocket think that the deal will quickly increase adjusted earnings per share after it closes. The combined company would have about 17% of the mortgage service market. By 2027, it is expected that the combined company will bring in $500 million a year before taxes, thanks to cost savings and income growth.
This article first appeared on GuruFocus.