Quick Note From the Editor - Taking a Closer Look at RKT.

By Chris Stiles • Thursday, September 08 17:16 • Permanent Link

With an average analyst rating of hold, Rocket Companies is clearly not an analyst favorite. But some of the best stock picks are contrarian in nature. With most analysts more focused on growth than on value, a mediocre analyst rating does not necessarily mean a stock is a bad investment. So what do we know about RKT's valuation?

The most common metric for valuing a company is its Price to Earnings (P/E) ratio. It's simply today's stock price of 7.68 divided by either its trailing or forward earnings, which for Rocket Companies are $1.8 and $0.77 respectively. Based on these values, the company's trailing P/E ratio is 4.3 and its forward P/E ratio is 10.0. By way of comparison, the average P/E ratio of the Financial Services sector is None and the average P/E ratio of the S&P 500 is 15.97.

Indebted or mismanaged companies can't sustain shareholder value for long, even if they have strong earnings. For this reason, considering Rocket's ability to meet its debt obligations is an important aspect of studying its valuation. By adding up its current assets, then subtracting its inventory and prepaid expenses, and then dividing the whole by its current liabilities, we obtain the company's Quick Ratio of 0.407. Since RKT's is lower than 1, it does not have the liquidity necessary to meet its current liabilities.

When we had up all the inflows and outflows of cash, including payments to creditors, we obtain Rocket's levered free cash flow of $16,159,519,744. This represents the money left over from the company's operations that is available for reinvestment in the business, or for paying out to equity investors in the form of a dividend. Despite its positive cash flows, Rocket Companies does not currently pay a dividend.

Overall, shares of Rocket Companies appear to be fairly valued or undervalued at today's prices despite the negative outlook from analysts. Sometimes stocks are cheap for a reason, and we believe RKT is suffering from higher interest rates and a smaller market for mortgage originations. So be sure to do your own due diligence if you are interested in taking a long position in RKT. To stay abreast of the latest market news, make sure to subscribe to our free daily newsletter!

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.