Is Walker & Dunlop Stock a Buy?

Is Walker & Dunlop Stock a Buy? Real estate financing company Walker & Dunlop (NYSE:WD) saw its shares plummet by nearly 50 percent in 2022. The selloff was mostly due to lower earnings and margins caused by rapidly rising interest rates.

 

Now that the stock is trading at about half its previous price, it could be an attractive buy for real estate-oriented investors. Here’s what you should know about Walker & Dunlop and whether it deserves a place in your portfolio.

 

Walker & Dunlop is a commercial real estate lender specializing in multifamily properties. The company offers both short-term and long-term financing for commercial real estate projects. It is also the number one commercial real estate lender in Fannie Mae’s financing network. Recently, Walker & Dunlop has focused heavily on low-income property lending.

 

In Q3, Walker & Dunlop generated $316 million in revenue, a drop of 9 percent from Q3 2021. Earnings were also down 37 percent, coming in at just $1.40 per share. Operating margin dropped to 17 percent, below management’s target range.

 

Despite these difficulties, management reassured investors that the company was in a good position for future growth during the Q3 earnings call.

 

The firm’s strong lending relationships with Fannie Mae and Freddie Mac were highlighted as management predicted more normal margins once interest rates stabilize.

 

The company also expects to be able to fare better than its competitors in the new interest rate environment of 2023 and beyond.

Walker & Dunlop’s growth over the last several years has been extremely rapid, driven in part by high demand for housing and rock-bottom interest rates.

 

Revenues rose at a compounded rate of 24 percent from 2011 to 2021, while earnings rose at 18 percent. In the coming 12 months, earnings are expected to grow by a further 25 percent. In the next five years, the company’s growth rate is expected to level out to an average of 10 percent.

 

This places Walker & Dunlop in the position of being a growth company that has temporarily stalled out. The issues the company is facing seem to come almost entirely from macroeconomic pressures.

 

As such, there’s a decent chance that growth will resume when conditions normalize. If this occurs, the stock could be a decent bargain at today’s prices.

 

Analysts project Walker & Dunlop stock to rise as high as $110 this year, implying a 40 percent upside. The stock holds a unanimous buy rating from the five analysts covering it.

 

In addition to its potential upside, Walker & Dunlop also pays a dividend that could help to augment total investor returns. The stock yields 3.06 percent, paying $2.40 per share annually.

 

Like its earnings and revenues, Walker & Dunlop has rapidly raised its dividend in recent years. The 3-year compounded distribution growth rate is nearly 26 percent. This growth is, however, expected to all but cease in the coming three years.

 

Walker & Dunlop seems to be a fair value at today’s prices. WD trades at 11.75 times forward earnings, making it reasonably cheap when compared to the predicted rate of earnings growth.

 

One concerning factor in the company’s valuation is its earnings yield, which is just over 8.5 percent. This is significantly lower than the sector average of 13.4 percent, suggesting that Walker & Dunlop could be pricier than its competitors.

 

The company has produced a strong free cash flow yield. Based on discounted cash flow forecast analysis, there is a 34.4 percent upside to fair value, which suggests that Walker and Dunlop stock is a buy.

 

Walker & Dunlop’s single biggest risk at this point is that of rising interest rates. The Federal Reserve’s fight against inflation has eaten into the margins of many lenders, including Walker & Dunlop.

 

Most projections suggest that interest rates will reach a peak of about 5 percent later in 2023, but there is little confidence yet that the Fed will stop at that level. If persistent inflation causes interest rate hikes beyond the 5 percent level, Walker & Dunlop could face further difficulties this year.

 

Walker & Dunlop is also carrying a significant amount of debt on its own books. At 1.92 times equity and about 66 percent of its long-term capitalization, Walker & Dunlop’s debt could present problems for it down the road. While the company seems to be managing its obligations well at the moment, a broader economic downturn could present difficulties.

 

Walker & Dunlop has a compelling long-term investment thesis. The company has achieved excellent growth rates over the last 10 years and is in a good position to raise its earnings when interest rates stabilize.

 

Walker & Dunlop’s leading position with Fannie Mae should afford it a decent economic moat, and the company could capture a significant amount of refinancing business if the Fed draws interest rates down in the future.

 

The company’s tightening focus on low-income housing loans could also prove to be profitable for investors. Housing affordability is rapidly becoming a political issue, raising the possibility of large sums of government funding for the effort to build more affordable housing units. Walker & Dunlop’s close relationship with Fannie Mae and Freddie Mac would likely put it in a prime position to profit from such efforts.

 

Although it could see anemic dividend growth for the next several years, Walker & Dunlop seems to fit reasonably well into an income-driven portfolio. The stock’s high dividend and payout ratio of just 32 percent offer the combination of decent income and minimal risk.

 

A final point in Walker & Dunlop’s favor is a stable and invested management team. The current CEO has been in place for 15 years, guiding the company through its decade of strong growth. Insiders also own about 8 percent of the company’s stock.

 

Walker & Dunlop could, however, struggle in 2023. An uncertain interest rate environment and the potential for a real estate market downturn could negatively impact lenders. In the long run, though, Walker & Dunlop will likely continue to deliver steady growth. With earnings poised to rise over the next 12 months, it appears that Walker & Dunlop could be approaching the early stages of a recovery.

 

Ultimately, Walker & Dunlop could be a good choice for conservative investors seeking income and the potential for growth when the real estate financing market rebounds. Walker & Dunlop may not generate massive returns this year if interest rates continue to rise, but the company appears to be on a solid growth trajectory. Given its ability to return cash to shareholders through dividends and potential to continue raising its share prices, Walker & Dunlop appears to be a moderate buy that could pay off over the long term.

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