Rocket Companies, despite receiving a hold rating from analysts, may present an opportunity for contrarian investors. While many analysts prioritize growth over value, a mediocre rating doesn't necessarily indicate a poor investment. Let's delve into Rocket Companies' valuation.
Over the past year, Rocket Companies' shares have fluctuated between $5.97 and $11.38, logging an overall 25.7% performance. This compares favorably with the S&P 500, which recorded a 14.7% change over the same period.
At the current price of $9.13 per share, Rocket Companies has a trailing price-to-earnings (P/E) ratio of 5.1. This ratio is based on its earnings per share of $1.8 over the past 12 months. Considering the future earnings estimate of $0.49 per share, the stock's forward P/E ratio is 18.6. Comparatively, the Finance sector's average P/E ratio is 14.34, and the S&P 500's average P/E ratio is 15.97.
The P/E ratio provides insight into how much investors are willing to pay for each dollar of the company's earnings. However, it fails to consider expected earnings growth. To address this, we can calculate the price-to-earnings growth (PEG) ratio by dividing the trailing P/E ratio by the company's five-year earnings growth estimate. For Rocket Companies, this yields a PEG ratio of 4.06.
A PEG ratio between 0 and 1 suggests an undervalued stock. This metric is valuable because a low P/E ratio may indicate no growth potential, while a high P/E ratio could still signify undervaluation if expected earnings growth is substantial. It's important to note that the PEG ratio relies on earnings growth estimates, which may be subject to manipulation.
Additionally, we can compare Rocket Companies' price-to-book value ratio. The book value represents the company's equity value, obtained by subtracting liabilities from assets. With a book value of 1.99, Rocket Companies appears potentially undervalued, particularly if the ratio is close to or below 1.
While evaluating the share price, earnings, and book value, it's essential to analyze a company's ability to meet its liabilities. The quick ratio, also known as the Acid Test, divides a company's current assets minus inventory and prepaid expenses by its current liabilities. Rocket Companies has a quick ratio of 0.629, indicating its capacity to fulfill its obligations.
Examining free cash flow, Rocket Companies generated $10.72 billion in cash after capital expenditures. Currently, the company has chosen to reinvest rather than pay regular dividends, which may deter investors seeking a predictable return on their capital.
Based on its earning multiple alone, Rocket Companies appears undervalued. However, analysts may assign a low rating due to perceived limited growth potential, as reflected in the elevated PEG ratio and widespread belief in mortgage industry headwinds. Growth-oriented investors might view Rocket Companies as cheap for a reason, and even value investors may not be willing to take the plunge without the promise of regular dividends.
