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small-cap

How is the Needle moving on these US Listed Stocks - UWMC and EGAN

Jun 23, 2021 | Team Kalkine
How is the Needle moving on these US Listed Stocks - UWMC and EGAN

 

UWM Holdings Corporation

UWM Holdings Corporation (NYSE: UWMC) is engaged in the origination, sale and servicing of residential mortgage loans. The company generates business from three major areas such as (i) loan production income, (ii) loan servicing income, and (iii) interest income. 

Key Highlights:

  • Technical Chart Showing weakness: On the daily price chart, The UWMC stock dived below the crucial support level of USD 9.47 recently. Moreover, in the previous trading session, the stock closed at USD 9.07, and traded below the 21-days simple moving average (SMA) of USD 9.25 level. These technical indicators are suggesting a bearish trend in the stock.

        

                One year technical chart, Analysis by Kalkine Group

  • Dip in Sequential Performance: The company derives its major income from the loan production segment, and in Q1FY21, the above segment reported an income of USD 1,074.665 million, significantly lower than USD 1,667.252 million in Q4FY20. Moreover, several operating expense like Salaries, commissions and benefits expenses remained extremely high at USD 213.061 million, as compared to USD 89.437 million in Q4FY20. The group also reported a surge in the Marketing, travel, and entertainment cost at USD 10.495 million, as compared to USD 6.452 million in the previous quarter. Net income was reported at USD 860.005 million, significantly lower than USD 1,371.791 million in Q4FY20.

Q1FY21 Financial Highlights:

  • UWMC announced its quarterly result, wherein the company posted total net revenue of USD 1,189.870 million, higher than USD 455.456 million in the previous corresponding period (pcp).
  • Total expenses stood at USD 316.979 million, down from USD 435.107 million in Q1FY20. The decline was primarily due to inclusion of expenses related to amortization, impairment and pay-offs of mortgage servicing rights amounting to USD 218.754 million in Q1FY20.
  • Net income stood higher at USD 860.005 million, as compared to USD 20.349 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Volatility in the interest rate and a slide in the fair value of interest rate lock commitments (IRLCs) and mortgage loans would likely to impact the overall performance of the company.

Stock Recommendation:

The group is battling with higher operating costs, which has resulted in a lower EBITDA and net margin of 79.5% and 68.8%, respectively in Q1FY21, as compared to 90.8% and 75.4%, respectively, in Q4FY20. Continuation of the above trend would likely dampen the upcoming performance. The stock corrected 18% and 16% in the last six months and nine months, respectively. Though the company delivered a decent performance on a YoY basis, it is deteriorating on a sequential basis. On the valuation front, the stock is trading at a price to book value multiple of 3.8x on an NTM basis as compared to the industry (Financials) median of 1.1x. Moreover, technical indicators are also showing weakness in the price. Hence, considering the aforesaid facts, we recommend an ‘Avoid’ rating on the stock at the closing price of USD 9.07 on June 22, 2021.

One-Year Technical Price Chart (as on June 22, 2021). Analysis by Kalkine Group

eGain Corp

eGain Corp (NASDAQ: EGAN) automates customer engagement with an innovative Software as a service (SaaS) platform, powered by deep digital, Artificial intelligence (AI), and knowledge capabilities. It provides its products to industries such as financial services, telecommunications, retail, government, healthcare, and utilities. 

Key highlights 

  • Fiscal 2021 financial guidance: On the back of an improving economy and increasing customer number, the company forecasts consolidated sales for FY2021 to be in the range of USD 77.3 - 77.9 million, representing a Y-o-Y increase of 6% to 7%. SaaS sales would be in the range of USD 66.0 to 66.4 million, reflecting a Y-o-Y increase of 16% to 17%. Annual net income is expected to be in between USD 4.4 and USD 5.3 million.
  • Lower cost of revenue improved gross margin: The company's cost of revenue decreased by 12% to USD 4.84 million in Q3 2021, compared to USD 5.50 million in the previous corresponding period. This reduction was mainly due to lower cloud computing and personnel-related costs. The total cost of revenue as a proportion of sales improved to 25% from 30%. As a result, gross margin increased to 75% from 70% in pcp.
  • Industry beating margins: Despite the second wave of the Covid-19 Pandemic, the Company maintained its pace and witnessed spirited performance across its margin matrix. In addition, the management’s solid determination helped them leap the industry median margins on many fronts in Q3 2021, although the gross margin slightly underperformed, but other margins exhibit the competitive advantage of the company within the industry. The chart below gives a glimpse of this.

  • Prices are sustaining above the rising trend line: On the weekly price chart, prices are taking the support of its rising trend line at USD 9.15 level. Moreover, the prices are trading above the 100-period simple moving average, which may act as a crucial support zone in medium term. The momentum oscillator RSI (14-period) is trading at ~50 level, which indicates a bullish momentum for the stock. However, the stock may face a resistance around USD 12 level in the near term.

Financial overview of Q 3 2021 (in thousands of USD)


Source: Company 

  • In Q3 2021, the company reported its revenue at USD 19.74 million compared to USD 18.35 million in the previous corresponding period. The rise in revenue was mainly due to healthy performance from both subscription and professional services.
  • On the back of higher revenue and lower cost of revenue, the company improved its gross profit to USD 14.89 million against USD 12.85 million in pcp.
  • Total expenses increased to USD 13.32 million in Q3 2021, against USD 11.09 million in pcp, mainly due to higher sales and marketing cost. As a result, the income from operations fell to USD 1.57 million compared to USD 1.75 million in pcp.
  • Net income in the reported period stood at USD 1.26 million compared to USD 1.86 million. The decline in net income was mainly due to the above-stated reasons.

Risks associated with investment

The company’s business depends substantially on clients renewing their agreements, purchasing additional products, or adding additional users. If customers do not renew their contracts with them or reduce the services purchased, the revenue would decline, and the business, operating results, and financial condition may be adversely affected. 

Valuation Methodology (Illustrative): EV to Sales 


Stock recommendation

In Q3 2021, the business achieved decent financial results, which was above management's expectations and street consensus, which is noteworthy. Its SaaS brand wins increased by more than 100% year over year in the third quarter and year to date, while million-dollar SaaS customers increased by 63%, demonstrating the positive effects of a progressively changing work environment. In addition, the firm provided sales and net income forecast for FY2021, which appears to be positive. Furthermore, the management's unwavering commitment allowed them to outperform the industry median margins on several fronts in Q3 2021, which is a significant plus. Based on technical analysis, the stock has support at USD 8.90 level. Therefore, based on the rationale discussed above and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of USD 10.88 on June 22, 2021. We have considered Intelligent Systems Corp, Gty Technology Holdings Inc, Smith Micro Software Inc, etc., as the peer group for the comparison.

 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Technical Price Chart (as on June 22, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.