Citi cuts Rocket Companies as valuation too stretched, lifts Sallie Mae on higher expected balance sheet growth

Citi analysts downgraded Rocket Companies (RKT) to Sell from Neutral and upgraded Sallie Mae (SLM (NASDAQ:)) to Buy from Neutral in a note Tuesday covering the US consumer finance sector.

The investment bank said they expect 2024 outlooks for consumer finance companies to be in line with or better than consensus expectations. In addition, they believe Credit quality will likely be the biggest focus for investors as NCOs are expected to peak in 1H or the middle of the year.

Sallie Mae was upgraded with the target price lifted to $23 from $14 due to higher expected balance sheet growth, the potential to grow market share from a competitor exit, and the bank expecting higher gain on sale margins as interest rates fall from elevated levels.

“The target rises due to higher EPS, rolling to 2025, and increasing the multiple to 7.1x from 5.2x,” said Citi. “While we acknowledge that this multiple is substantially higher than our prior multiple, we believe it represents a better view of SLM’s growth opportunities as it moves away from selling the bulk of its loan production in the coming years.”

Meanwhile, they raised the RKT price target to $10 from $9, noting the company’s shares are up 52% over the past three months.

“While we believe RKT shares deserve a premium multiple given its strong brand and technology-forward approach to the mortgage market, we believe that valuation is too stretched at these levels,” the firm stated.