PHH plans large buyback to boost its stock price

October 19, 1994|By Kim Clark | Kim Clark,Sun Staff Writer

In an effort to persuade skeptical investors that their stock is worth more than the going price, PHH Corp. announced yesterday that it would buy back as many as 1.7 million shares -- or about 10 percent of those outstanding.

"We feel we are an undervalued stock. And we are putting our actions to the test," said PHH spokesman Peter Brinch.

Mr. Brinch said he believes the company's stock, which finished trading yesterday at $37.25 up 37.5 cents, should be several dollars higher.

The Hunt Valley-based business services company also said it had just completed a 6-year, 800,000-share buyback.

A buyback tends to increase stock prices because it increases demand for the stock while reducing the number shares available for sale. In addition, buybacks boost per-share earnings because they reduce the number of shares outstanding.

Company officials, which will use cash for the purchase, declined to give a target price or completion date for the buyback. PHH has about 17.3 million shares outstanding.

PHH, which earned $64.6 million on revenues of $2.1 billion in its fiscal year ended April 30, manages corporate car fleets, helps businesses relocate employees and offers mortgages.

That diversification, Mr. Brinch said, confuses stock analysts. "Some people think of us as a financial services company, but we don't like that" because rising interest rates have caused investors to drive down the prices of stocks of companies that hold low-interest mortgages, he said.

But since PHH has two major divisions that aren't affected by interest rates, and has reported increases in profits for the last 11 quarters, the company's stock ought to be valued like that of other growing service companies, he said.

Some investors and analysts praised the move yesterday.

Alex C. Hart, who follows PHH for Ferris, Baker Watts Inc. in Baltimore, said he recommends PHH stock and was glad the company would be providing a "floor" for the stock price.

PHH's stock price has fallen in recent months because "they've been painted with mortgage banking company brush," he said. And investors are still worried about poor earnings in the vehicle management division, he said.

But he believes the company has turned around its troubled divisions. The stock, which is currently selling at about nine times next year's expected per share earnings, "ought to be in the 12 to 13 range" -- which would put the price somewhere between $48 and $53, he said.

But some investors disagree, saying they are already accurately assessing PHH's value.

Robert Boyd, managing director of Brandywine Asset Management in Wilmington, Del., said he had been selling some of his firm's nearly 200,000 shares of PHH in recent weeks because he views the company as a "financial institution," which has reached a fair stock price.

While he praises the company's careful management -- and believes the stock could reach $48 a share -- he noted that PHH has only occasionally increased its dividend payout to investors.

"The outlook for dividend growth is adequate but not great. The total return is not robust," he said.

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