Rating Update: Stock Rating A-Highest (3/20/20)-Walker & Dunlop Inc (WD).

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BUSINESS

Walker & Dunlop, Inc., through its subsidiaries, originates, sells, and services a range of multifamily and other commercial real estate loans for owners and developers of real estate in the United States. The company offers multifamily properties and commercial real estate finance products, such as first mortgage loans, second trust loans, supplemental financings, construction loans, mezzanine loans, and bridge/interim loans. It provides multifamily finance for multifamily, manufactured housing communities, student housing, affordable, and senior housing properties under the Fannie Mae DUS program; and FHA finance, such as construction and permanent loans to developers and owners of multifamily housing, affordable housing, senior housing, and healthcare facilities.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be above the cost of capital, WD is expected to continue to be a Value Builder.

Walker & Dunlop has a current Value Trend Rating of A (Highest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing consistent signals. Walker & Dunlop has a good Appreciation Score of 75 and a very high Power Rating of 97, resulting in the Highest Value Trend Rating.

Walker & Dunlop’s stock is selling well below targeted value. The current stock price of $38.88 compares to targeted value 12 months forward of $114.
Walker & Dunlop’s high appreciation potential results in an appreciation score of 75 (only 25% of the universe has greater appreciation potential.)
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Walker & Dunlop has a Power Rating of 97. (This very high Power Rating indicates that WD has a better chance of achieving attractive investment performance over the near to intermediate term than all but 3% of companies in the universe.)
Factors contributing to this very high Power Rating include: is in an extremely strong phase current; the recent trend in WD’s earnings estimates has been extremely favorable; and recent price action has been extremely favorable.

INVESTMENT PROFILE

WD’s financial strength is exceptional. Financial strength rating is 100.
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Relative to the S&P 500 Composite, Walker & Dunlop Inc has neutral Growth/Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that WD is lower risk. All factors are relative strengths. WD’s valuation is low: moderate dividend yield, low P/E ratio, and low price/book ratio. WD has unusually low market capitalization.

CURRENT SIGNALS

Walker & Dunlop’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; falling tax keep rate; and falling leverage.

Walker & Dunlop’s current technical position is very weak. The stock price is in a 1.2 month down move. The stock has declined 33.6% from its prior high. The stock price is below its 200 day moving average which is in a downtrend. The 200 day moving average has just turned down. Walker & Dunlop’s stock price decline is extreme and the stock appears oversold.

ALERTS

Recent meaningful negative changes in investment behavior have impacted Walker & Dunlop Inc (NYSE: WD): its longer term price trend turned down.
The stock is currently rated A.
Walker & Dunlop Inc (NYSE: WD) stock enjoyed a major increase of 11.1% on 3/20/20. The shares closed at $0.10. Moreover, above average trading volume at 136% of normal accompanied the advance. The stock has been exceptionally strong relative to the market over the last nine months but has declined -24.8% during the last week.

CASH FLOW

In 2019, Walker & Dunlop generated a significant increase in cash of +$23.9 million (+11%). Sources of cash were larger than uses. Cash generated from 2019 EBITDA totalled +$455.3 million. Non-operating sources contributed +$0.1 million (0% of EBITDA). Cash taxes consumed -$35.9 million (-8% of EBITDA). Re-investment in the business amounted to -$54.3 million (-12% of EBITDA). On a net basis, debt investors withdrew -$301.6 million (-66% of EBITDA) while equity investors pulled out -$39.8 million (-9% of EBITDA).
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Walker & Dunlop’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Walker & Dunlop Inc Peer Group as well. In most years, Walker & Dunlop was in the third quartile and second quartile. Currently, Walker & Dunlop is slightly above median at 0% of EBITDA (+$0.1 million).

Walker & Dunlop’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Walker & Dunlop Inc Peer Group as well. In most years, Walker & Dunlop was in the second quartile. Currently, Walker & Dunlop is above median at -8% of EBITDA (-$35.9 million).

Walker & Dunlop’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Walker & Dunlop Inc Peer Group. In most years, Walker & Dunlop was in the top quartile and lower quartile. Currently, Walker & Dunlop is upper quartile at -12% of EBITDA (-$54.3 million).

Walker & Dunlop’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Walker & Dunlop Inc Peer Group. In most years, Walker & Dunlop was in the top quartile and lower quartile. Currently, Walker & Dunlop is lower quartile at -66% of EBITDA (-$301.6 million).

Walker & Dunlop’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Walker & Dunlop Inc Peer Group. In most years, Walker & Dunlop was in the top quartile and second quartile. Currently, Walker & Dunlop is upper quartile at -9% of EBITDA (-$39.8 million).

Walker & Dunlop’s Change in Cash, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Walker & Dunlop Inc Peer Group. In most years, Walker & Dunlop was in the top quartile and lower quartile. Currently, Walker & Dunlop is slightly above median at +5% of EBITDA (+$23.9 million).
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Walker & Dunlop’s Cash, %Revenue has experienced a minor downtrend over the period. This downtrend was accompanied by a similar trend for the Walker & Dunlop Inc Peer Group. (Since 2013 Cash, %Revenue has acccelerated.) In most years, Walker & Dunlop was in the second quartile and top quartile. Currently, Walker & Dunlop is above median at +29%.

PROFITABILITY

Walker & Dunlop’s return on equity has improved very significantly since 2010 although it experienced a very sharp decline after the 2017 high.
This very significant improvement was due to strong positive trend in pretax operating return supported by very strong positive trend in non-operating factors.
The productivity of Walker & Dunlop’s assets rose over the full period 2010-2019: asset turnover has enjoyed a volatile overall uptrend but it recently stabilized from the 2017 level.
Additionally, pretax margin has exhibited little to no overall change but it experienced sharp improvement from the 2013 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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Walker & Dunlop’s return on equity is at the upper quartile (16.7%) for the four quarters ended December, 2019.
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Operating performance (pretax return on assets) is above median (8.6%) reflecting asset turnover that is above median (0.33X) and above median pretax margin (26.3%).
Tax “keep” rate (income tax management) is at median (75.3%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is at the upper quartile (2.58X).

GROWTH RATES

Overall, Walker & Dunlop’s growth rate has slowed considerably in recent years.
Walker & Dunlop’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 19.5% per year.

Total asset growth has been 15.7% per year. (More recently it has been -4.6%.)

Annual E.P.S. growth has been 28.2% per year. (More recently it has been -3.5%.)

Equity growth has been 20.2% per year.
No consensus growth rate forecast is available for Walker & Dunlop.
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Relative to the Walker & Dunlop Inc Peer Group, Walker & Dunlop’s historical growth measures are consistently top quartile. Revenue growth (19.5%) has been upper quartile. E.P.S. growth (28.2%) has been upper quartile. Equity growth (20.2%) has been upper quartile. Total asset growth (15.7%) has been at the upper quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Walker & Dunlop’s stock price performance has been variable and exceptional. Between December, 2010 and March, 2020, Walker & Dunlop’s stock price rose +285%; relative to the market, this was a +110% gain. Significant price moves during the period: 1) April, 2016 – March, 2018: +169%; 2) September, 2014 – November, 2015: +122%; and 3) December, 2010 – January, 2013: +113%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 18.7% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through February, 2020 of 18.7% is at the upper quartile relative to Walker & Dunlop Inc Peer Group.

Current 5-year total return performance of 33.5% is upper quartile relative to the S&P 500 Composite.
Through February, 2020, with upper quartile current 5-year total return of 33.5% relative to S&P 500 Composite, Walker & Dunlop’s total return performance is upper quartile relative to Walker & Dunlop Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, WD’s overall valuation is low. The highest factor, the ratio of enterprise value/revenue, is slightly above median. Ratio of enterprise value/assets is below median. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Price/equity ratio is near the lower quartile. The lowest factor, the price/earnings ratio, is lower quartile.
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Walker & Dunlop has a minor value gap compared to the median valuation. For WD to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 2.49X to 2.61X. If WD’s ratio of enterprise value/revenue were to rise to 2.61X, its stock price would be lower by $3 to $42.
For WD to hit lower quartile valuation relative to the Walker & Dunlop Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 2.49X to 1.91X. If WD’s ratio of enterprise value/revenue were to fall to 1.91X, its stock price would decline by $-16 from the current level of $39.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be above the cost of capital, WD is expected to continue to be a Value Builder.
Walker & Dunlop’s current Price Target of $118 represents a +203% change from the current price of $38.88.
This high appreciation potential results in an appreciation score of 75 (only 25% of the universe has greater appreciation potential.)
Reinforcing this high Appreciation Score of 75, the high Power Rating of 97 contributes to an Value Trend Rating of A.
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Walker & Dunlop’s current Price Target is $118 (+12% from the 2019 Target of $105 and +203% from the 03/20/20 price of $38.88). This slight rise in the Target is the result of a +20% increase in the equity base and a -7% decrease in the price/equity multiple. The forecasted decline in growth has a slight negative impact on the price/equity multiple and the forecasted decline in return on equity has a slight negative impact as well. Partially offsetting these Drivers, the forecasted decline in cost of equity has a slight positive impact.
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PTR’s return on equity forecast is 14.0% — in line with our recent forecasts. Forecasted return on equity exhibited a modest, erratic decline between 2011 and 2019. The current forecast is below the 2011 peak of 18%.

PTR’s growth forecast is 14.0% — slightly below our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2011 and 2019. The current forecast is significantly below the 2011 peak of 62%.

PTR’s cost of equity forecast is 9.7% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, variable decline between 2011 and 2019. The current forecast is below the 2012 peak of 14.1%.
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At Walker & Dunlop’s current price of $38.88, investors are placing a negative value of $-19 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 17.0% per year, and a return on equity of 14.5% versus a cost of equity of 10.1%.
PTR’s 2021 Price Target of $118 is based on these forecasts and reflects an estimated value of existing assets of $46 and a value of future investments of $72.

About John Lafferty 69677 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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