Analysts see growing strength in all PHH divisions

May 25, 1994|By Joel Obermayer | Joel Obermayer,Sun Staff Writer

After a year of uneven growth, PHH Corp. is poised to grow steadily, with all three of its divisions contributing.

Analysts said that the Hunt Valley-based company got a big boost last year from its mortgage banking division, and that as that division slows down the company's revamped fleet management and executive relocation businesses will be picking up the slack.

After reaching $46.75 last fall, the company's shares fell to $33.25 this year on fears that interest rate increases would hurt its businesses. But most analysts said that those fears were overplayed and that the company could easily climb back.

"They are not hitting on all cylinders yet," said David M. West, an analyst with Davenport & Co. in Richmond, Va. "But they have been good at using areas where they have specific strengths to fix other areas where they are not as strong."

Mortgage banking started as a side line to PHH's main businesses: buying and maintaining fleets of vehicles for corporations and providing executive relocation services.

Over the last few years, PHH has been able to use money from mortgage banking to pay for an overhaul of its vehicle services business. That division is planning to grow by selling fee-based services such as maintenance and repair contracts.

"Let's say I'm in Brooklyn and my car breaks down," said Kevin O'Brien, an analyst with Alex. Brown Inc. in Baltimore. "They can recommend four or five repair shops nearby and they'll have a history of their dealings with each one."

Such fee revenues are just beginning to show up on the company's bottom line, said Alex Hart, an analyst at Ferris Baker Watts in Baltimore. He said that similar efforts are under way in the company's lagging executive relocation business.

For PHH's fiscal year ended April 30, earnings increased 14 percent to $65 million, or $3.64 a share, from $56 million or $3.25 a share last year. Company executives estimated that more than 35 percent of the pretax profits were from mortgage banking.

The company said revenues from its fleet management business grew 8.7 percent to $1.2 billion last year, while revenues at its executive relocation business shrank 1.6 percent to $816 million -- the fourth straight yearly decline -- because of spending cutbacks by major customers. The company's total revenues grew 5.6 percent, to $2.1 billion.

In trading yesterday the company's stock closed at $36.13, down 12 cents from Monday's close.

"My thinking is they've turned that vehicle business pretty hard, if they do the same thing with the relocation business, I would look for a stronger contribution in the second half of fiscal 1995," Mr. Hart said.

He rated the company a buy and said the latest results would probably cause him to raise his earnings estimates for this year to at least $4 a share, up from $3.89.

PHH Chief Executive Officer Robert D. Kunisch said he expects the divisions to pull in unison this year.

"We expect growth in fiscal 1995 to be more evenly distributed over our three business segments than in recent years," he said.

With most earnings growth projections in a modest 10-percent-to-15-percent range, Mr. West said PHH is a good company to buy on weakness.

When interest-rate jitters hit the stock market earlier this year, PHH's stock dropped rapidly. Mr. West said investors were worried that rising interest rates might cut off growth in mortgage banking. He said the division will continue to get income by servicing a $16 billion loan portfolio, which will become more valuable if rates continue to rise because few people will refinance.

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