Walker & Dunlop's Slide: Three Red Flags for Investors and a Safer Alternative

Shares of commercial real estate finance firm Walker & Dunlop (NYSE: WD) have significantly underperformed the broader market, declining 14.6% over the past six months to trade around $64.58. This slump contrasts sharply with the S&P 500's 9.6% gain during the same period, raising questions about the company's near-term prospects amid a challenging interest rate environment.

While the lower share price may appear tempting to some value hunters, a deeper look at the company's fundamentals reveals persistent headwinds. Here are three key concerns that suggest caution is warranted, along with a look at a potentially more resilient investment alternative.

1. Erosion of Core Profitability

For financial firms, net interest income is a critical gauge of core lending health. Over the last five years, Walker & Dunlop's net interest income has contracted at an alarming annualized rate of 43.8%, far steeper than the broader banking sector's trend. This indicates its core lending operations have underperformed other business segments, relying more on less predictable one-time fees.

2. Profit Growth Lagging Behind Sales

Despite posting a 5.4% annual revenue growth over the past five years, the company's earnings per share (EPS) have actually declined by 6.7% per year. This divergence suggests that Walker & Dunlop's expansion has come at a cost to profitability, potentially due to rising expenses or competitive pressures that have squeezed margins.

3. A Slow Recovery in Tangible Value

Tangible book value per share (TBVPS), a key measure of a bank's underlying asset value, declined at a 4.4% annual clip over the five-year period. A recent positive inflection—with TBVPS growing 13.7% annually over the last two years—offers a glimmer of hope, but it follows a period of significant erosion in shareholder value.

At a forward price-to-book ratio of 1.2x, Walker & Dunlop isn't priced for disaster, but the risk-reward profile appears lackluster. For investors seeking stability and growth, other opportunities in the financial sector may offer a clearer path.

The Verdict & An Alternative

Walker & Dunlop faces structural challenges in its core business. Instead, investors might consider established financial names with more consistent interest income and robust TBVPS growth—qualities reminiscent of some of Charlie Munger's long-admired investments. In volatile markets, prioritizing high-quality balance sheets and durable revenue streams is paramount.

Michael R., Portfolio Manager, Boston: "The TBVPS trend is the real story here. Two years of recovery doesn't erase five years of decline. In this climate, you need a fortress balance sheet, and WD's foundation has shown cracks."

Lisa T., Independent Investor: "I'm cautiously optimistic. The recent TBVPS growth is a strong signal. If they can sustain that while navigating rates, the current price could be a great entry point for the long haul."

David K., Market Commentator: "This is a classic case of a business being out of sync with the cycle. Their fee-heavy model got exposed when lending dried up. Calling this a 'buy' now is hoping for a turnaround that the data doesn't yet support."

Sarah J., CFA, Investment Blog Author: "The EPS/revenue disconnect is a major red flag for me. It screams inefficiency. Why would I buy a company getting less profitable as it grows when there are so many other options?"

Disclosure: This analysis is for informational purposes only and does not constitute financial advice. Investors should conduct their own research or consult a financial advisor.