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ASPS: Screens Cheap, Trades Cheaper. $65 Price Target On Catalyst Seven Months From Today.

Following the announcement on October 22nd of a healthy 25% beat to Q3 2015 adj. earnings ($2.27 per share vs. $1.82 est.) ASPS traded down from $31.77 to its current price of $27.76. We believe ASPS continues to present an extremely compelling investment. ASPS trades cheap on a historical basis and we believe the market is severely underestimating their ability to grow non-Ocwen revenue while overestimating ongoing Ocwen-related risks. We believe this stock will re-rate to an 8x P/E once management provides 2017 guidance and has provided a year of solid earnings away from Ocwen. This will have taken place by their Q1 2016 release in April 2016. Therefore, our Spring 2016 price target is $65 implying a 135% gross return and 470% IRR. ASPS is currently ~$535mm Market Cap, $945mm EV and trades about $11mm per day.

Altisource Portfolio Solutions SA (NASDAQ:ASPS) is primarily a provider of software and analytics tools for mortgage servicers and financial services companies in the real estate and consumer finance space.

The stock has traded down from a high of $170 in December of 2013 due to regulatory issues at ASPS's primary customer, Ocwen. These regulatory issues have since been settled and never directly affected ASPS.

ASPS has LTM Adjusted Net Income of $118.4mm. This implies a P/E ratio of 4.5x and includes two horrendous Q's (Q4 14 and Q1 15) as they addressed their issues with Ocwen. Using sell side estimates of $29.95mm Adj. Net Income in Q4 15 and $22.25mm in Q1 16 implies that once ASPS clears these two poor quarters they'll have LTM Adj. Net Income of 152.7mm, implying a P/E of 3.5x.

ASPS Management has guided to 2016 Adj. Net Income of $85mm-$160mm, implying a forward P/E of 6.3x to 3.3x. For what it's worth, in January of 2015 ASPS management guided to $95mm-$160mm of Adj. Net Income for 2015. Despite an extremely tumultuous year, it is unfathomably unlikely that ASPS underperforms the midpoint of their 2015 guidance.

ASPS is trading extremely cheap on a historical basis. The market finds little credence in management's ability to generate comparable earnings going forward, let alone generate earnings growth in the future. There are three somewhat intertwined reasons for this 1) going-concern risk for Ocwen 2) concerns regarding Ocwen's ability to write new business and generate mortgage servicing revenue for ASPS and 3) questions regarding ASPS's ability to generate top line growth through their newer non-Ocwen businesses.

Ocwen Going Concern Risk: OCN traded to a low of ~$5.65 in Jan/Feb of this year as numerous parties put a huge amount of pressure on the Company. The NYDFS forced Ocwen to stop acquiring new Mortgage Servicing Rights, a hedge fund group asserted that the actions initiated by the NYDFS represented a default under Ocwen's servicing agreements and pushed for mortgage trustees to move business away from Ocwen, and ratings agencies downgraded Ocwen's servicer ratings (as distinct from their credit ratings).

Since this time, Benjamin Lawsky, the Superintendent of New York State Financial Services and effective head of the NYDFS has stepped down, noise relating to trustee-instructed transfers has died down completely and ratings agencies are likely to upgrade in the near future (the ratings agencies are discussed in more detail below).

Given the above, we believe that the chances of Ocwen going anywhere are mitigated and are in the single figure percentage likelihood. OCN stock has traded poorly as there is concern in the market regarding their ability to maintain positive cash flow. However, ASPS does not need Ocwen to be earning significant amounts in order to be successful. They merely need Ocwen to maintain current operations.

There is a related concern that New Residential Investment Corp (NYSE:NRZ) will be able to take control of Ocwen's non-agency MSRs in 2017 if S&P has not upgraded Ocwen's servicer rating by then. We believe this to be highly unlikely. Firstly, we believe that S&P will upgrade Ocwen well prior to 2017 as OCN management continues to work with the agency to obtain an upgrade which would move S&P's rating of Ocwen to roughly on par with Moody's. Secondly, even if is there is no upgrade, our diligence indicates that it is extremely difficult from both an operational and regulatory perspective to transfer MSRs in the manner NRZ would need. Given that the legacy MSR book would only have 3-4 years of useful life at that point we have a hard time understanding what possible incentive NRZ would have to undertake such a procedure.

Ocwen-related MSR growth: The below slide is pulled from ASPS's Q3 2015 earnings call presentation. ASPS outlines their...


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