Bank Of America Cut Its Fair Isaac Price Target In Half And The Stock Still Fell Below It

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Fair Isaac (NYSE:FICO) slid below $600 in its latest session, closing at $592.52 after Bank of America (NYSE:BAC) downgraded the stock to Neutral from Buy and cut its price target to $700 from $1,400.

A cut of that size suggests the bank has lost faith in the upside thesis. The stock fell another 4.10% anyway, from a prior close of $617.87.

The market is pricing in something worse than the bank’s reduced view, even though that $700 target still sits above the share price. The average Wall Street target of $1,341.16 sits much higher, although it likely includes estimates set before the latest regulatory news.

The question is whether lenders switch from FICO once there is no pricing penalty, and whether FICO can sustain price increases under scrutiny.

How a Single Pricing Grid Erased FICO’s Mortgage Edge

Fannie Mae and Freddie Mac buy a large share of U.S. home loans and price them partly on borrower credit scores. The Federal Housing Finance Agency said the two will put VantageScore on a single pricing grid with Classic FICO, removing a 20-point penalty that protected FICO’s position.

No start date was given. Rocket Mortgage, the lending arm of Rocket Companies (NYSE:RKT), then named the newer VantageScore model its preferred option, an early sign that big lenders may act on the change.

The stock fell 26.52% that session from $840.89, described by Forbes as its worst day since 1989.

Even a Halved Target Still Sits Above the Share Price

Bank of America’s analysts said the decision “removes a key distinction between the models, and follows a series of regulatory developments.” They added that “the revised grid adds another risk to score volumes, pricing, and market share.”

Other firms cut too, although less sharply. BMO Capital Markets lowered its target to $1,150 from $1,550 while keeping an Outperform rating, and UBS trimmed its target to $1,130 from $1,200.

The Street still leans bullish. Among analysts, 5 rate the stock a Strong Buy and 9 rate it a Buy, while 6 rate it a Hold and 1 rates it a Sell.

FICO’s Growth Came From Price, Which Regulators Now Watch

FICO’s recent growth leaned heavily on mortgage pricing. Mortgage origination revenue rose 97% in the fiscal third quarter and made up 62% of total scores revenue, while mortgage score volumes grew only in the low single digits.

The bank’s analysts highlighted that dependence directly: “High and persistent regulatory scrutiny may limit Fair Isaac’s leeway on headline Score price increases.” Slow volume growth makes any cap costly.

Management said lenders pull both scores rather than replacing FICO, and estimated the share of consumers who benefit from VantageScore at a figure “in the 20s”. VantageScore was used on about 9% of Fannie and Freddie mortgages between May and August.

FICO bought back 1.705 million shares for $1.96 billion at an average of $1,149 per share, funded partly with a $1.5 billion term loan. It ended the quarter with $5.58 billion of debt and a stockholders’ deficit of $4.1 billion.

What Investors Need to See Before FICO Stock Recovers

The stock is down 48.36% over the past month and 64.96% this year, while the S&P 500 has gained 11.84% year to date. The stock looks cheap, but its valuation rests on mortgage pricing power that is now in question.

It becomes a value trap if large lenders follow Rocket once the grid takes effect, because each lost pull hits the highest-priced part of the business while debt stays elevated. A pending investigation announced by Levi & Korsinsky adds another concern.

The risks outweigh the discount until the evidence changes. The trigger to check is an implementation date for the single pricing grid, plus lender adoption data showing whether VantageScore’s share moves significantly above about 9%.

A useful comparison is TransUnion (NYSE:TRU), which sells the underlying credit data, whichever score a lender uses, making it less dependent on who wins the score competition.

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