Mortgage servicer Walter Investment (WAC) fell 20% yesterday after missing analysts' expectations. For the fourth quarter of 2012, Walter only achieved 0.64 in EPS versus (14.3% growth year over year). Analysts expected 0.67 in EPS. Big whoop.

The market has likely overreacted and is not giving enough weight to enormous amount of progress Walter has made in the past two years in transforming from a REIT into a full-fledged mortgage servicer. Walter has tripled its mortgage servicing portfolio from $86 billion of unpaid principal balance in 2011 to $245 billion currently and investors have yet to see the large profits that will eventually come from this enormous portfolio. 

Walter earned $242 million of EBITDA in 2012 and they estimate they will achieve somewhere between $650 and $725 million in 2013. Assuming they earn $700 million in EBITDA and giving that a multiple of 6.5, we get a value of $4,550 million. Subtract $2,738 of net debt and we get a fair value of $1,812 million for the business. Divide by 34.85 million shares outstanding and we get a price per share of $52. With the current price at about $34.20, you can buy this company at a 34% discount if you think the above scenario is reasonable. This seems like a very attractive discount for a company with an extremely predictable stream of cash flows, especially one that will benefit if/when interest rates begin to increase.


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