UWM Shares Fall Sharply Today -- Let's Look at the Numbers

Standing out among the Street's worst performers today is UWM, a diversified financial company whose shares slumped -5.5% to a price of $7.1, 11.81% above its average analyst target price of $6.35.

The average analyst rating for the stock is hold. UWMC underperformed the S&P 500 index by -5.0% during today's morning session, but outpaced it by 11.1% over the last year with a return of 37.3%.

UWM Holdings Corporation engages in the residential mortgage lending business in the United States. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.

As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.

UWM's trailing 12 month P/E ratio is 88.8, based on its trailing EPS of $0.08. The company has a forward P/E ratio of 16.9 according to its forward EPS of $0.42 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the finance sector has an average P/E ratio of 12.38, and the average for the S&P 500 is 15.97.

One limitation P/E ratios is that they don't tell us to what extent future growth expectations are priced into UWM market valuation. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. On the other hand, it's possible for companies with high P/E ratios to be fairly valued in terms of their growth expectations.

Dividing UWM's P/E ratio by its projected 5 year earnings growth rate gives us its Price to Earnings Growth (PEG) ratio of -2.92. Since it's negative, either the company's current P/E ratio or its growth rate is negative -- neither of which is a good sign.

To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in UWM's free cash flow, which was $138.81 Million as of its most recent annual report. The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $-1030951400.0 and they've been growing at an average rate of 1.0%. UWMC's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 5.3% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Uwm's P/B ratio is 5.9 -- in other words, the market value of the company exceeds its book value by a factor of more than 5, so the company's assets may be overvalued compared to the average P/B ratio of the Finance sector, which stands at 1.58 as of the first quarter of 2023.

UWM is likely overvalued at today's prices because it has a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and negative cash flows with a flat trend. The stock has poor growth indicators because of its with a negative growth trend, and no PEG ratio. We hope this preliminary analysis will encourage you to do your own research into UWMC's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.

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.

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