Why Walter Investment Management Shares Jumped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of mortgage-loan services provider Walter Investment Management (NYSE: WAC  ) were charging ahead today, gaining as much as 15% in intraday trading.

So what: Typically when a buyout takes place, the company being bought -- if it's a public company -- goes way up, while the acquirer's stock, if it does anything, often goes down. That was hardly the case with Walter Investment today. The company announced that it's buying Reverse Mortgage Solutions, a specialist in the reverse mortgage market, for $120 million. Investors pushed Walter's shares way up on the news.

Now what: There are at least two good reasons for Walter's investors to be excited about this deal. First and foremost, it appears that the company got a steal of a deal here. According to Walter's press release, it purchased RMS for just 2.6 times expected 2012 EBITDA (a measure of cash flow). It also said the deal will be "significantly accretive" to both earnings and cash flow.

Looking out further, the addition of RMS could also be a growth driver for Walter. A reverse mortgage allows homeowners who own their home to take out a loan against the house to augment their income. This is a loan typically used by older and retired people -- a group that is set to grow drastically in the years ahead.

Now this all needs to play out as expected for it to truly be in Walter's favor -- that is, RMS needs to earn what it's expected to earn in the years ahead, and the reverse-mortgage market needs to deliver on the expected growth. But the view from today looks pretty promising.

Want to keep up to date on Walter Investment Management? Add it to your Watchlist.

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