Here's Why PHH Corporation's Foundation Crumbled on Thursday

By Sean Williams Markets Fool.com

What happened

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Shares of PHH Corporation (NYSE: PHH), a provider of outsourced mortgage-banking services to financial institutions and real estate brokers in the U.S., crumbled at its foundation and lost as much as 20% on Thursday after the company announced its fourth-quarter earnings results and updated Wall Street on its strategic plans following a yearlong review.

So what

As you may have rightly surmised from today's move lower, the results were not to Wall Street's or investors' expectations. PHH wound up reporting a fourth-quarter loss of $133 million, or $2.49 per share, with a core loss of $1.86 per share. Comparatively speaking, Wall Street was only anticipating a loss of $0.54 per share, meaning PHH blew the lid off of Wall Street's consensus in the wrong direction.

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CEO Glen Messina commented in the press release that certain expenses weighed down its fourth-quarter results, including a writedown of its investment in the STARS appraisal business, transaction and advisory expenses associated with the yearlong strategic-review process, and the exiting of its private-label mortgage solutions (PLS) business. The company expects its exit from its PLS business to cost roughly $120 million.

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Looking ahead, following the aforementioned strategic review, PHH has decided to narrow the focus of its mortgage-banking services and exit its least profitable businesses. This should surprise none of PHH's shareholders, as the company has been selling assets and exiting non-core businesses seemingly left and right over the past couple of months.

In the words of Messina, 'We believe the remaining business platforms comprised of subservicing and portfolio retention have the potential to achieve low double-digit to mid-teen returns on capital after the completion of certain cost reengineering, PLS exit, organic growth, and return of capital actions, and the resolution of our legacy legal and regulatory matters.'

Image source: Getty Images.

Now what

On one hand, PHH's focus on its more profitable businesses should be viewed as a good sign by Wall Street and investors. PHH has at least taken the time to understand that the mortgage-servicing dynamics have changed, and it's not worth investments in lower-margin operating segments at this stage of the game with interest rates likely on the rise. PHH could very well achieve its double-digit returns on capital in the years to come.

However, today's report also implies that PHH has a long road to recovery ahead. It's going to take time to complete its business restructuring, which means there could be multiple quarters of earnings reports to come that make shareholders want to bury their heads under the covers.

Additionally, this strategic review assumes the mortgage market continues to behave as forecast, which we know isn't always the case. There's always the risk that PHH's turnaround is thwarted by a large decline in mortgage-servicing needs.

With losses looking likely in the near term, my personal suggestion would be for investors to monitor PHH from the safety of the sidelines.

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Sean Williams has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.