FBR Capital Markets upgraded its rating on shares of Flagstar Bancorp, Inc. (NYSE: FBC) to "outperform" from "market perform" and raised its price target to $2 from $1.75, after its reassessment of the company's burn-down book value.

"Given that the company is a step closer to profitability this quarter, we believe that Flagstar Bancorp merits the full deferred tax asset benefit. As such, we estimate a first quarter of 2011 burn-down tangible book value (TBV) of $2.20 after accounting for possible additional asset sales, a $0.16 negative hit to TBV, and a deferred tax asset (DTA) benefit of $0.61, assuming the company can repay TARP with cash," said Paul Miller Jr., an analyst at FBR Capital Markets.

Miller said his $2.00 price target represents 0.9 times of burn-down book value as he factor in execution risk. Although Flagstar Bancorp remains one of the riskier names under the coverage, he believes that the current valuation offers a buying opportunity for the appropriate investor.

Further, Miller believes that the downside is well protected at current levels; even if the company cannot earn the DTA back and profitability is pushed out several quarters, he estimates tangible book value of about $1.50.

Flagstar Bancorp reported GAAP loss of $0.06 per share, wider than both FBR and consensus expectations loss of $0.02. The miss was largely driven by lower net interest income as well as lower gain on sale margins.

Additionally, net interest margin declined 40 basis points to 1.68 percent as average earning assets fell 9.7 percent, and the company's reserve level remains elevated at 4.72 percent of loans even though Flagstar released $3 million of reserves.

Although the company has successfully sold roughly $407 million of non-performing assets, credit quality remains a concern. Non-performing assets increased $49 million or 9.8 percent to $547 million, primarily due to a $64 million increase in residential mortgage non-performing loans.

The company also carries $592 million of performing troubled debt restructurings (TDR) on its books at about $0.92 (after reserves), for which they have received indications of $0.70. That said, management is aggressively working through its problem credits, and Miller believes the company could be close to reaching an inflection point with regards to credit.

Flagstar Bancorp currently has a $340 million, or $0.61 per share, deferred tax asset that, in Miller's view, will likely benefit the company as it becomes profitable. Additionally, the company is taking constructive steps toward shifting its business model from mortgage banking -- dependent to a commercial bank model. If management is successful, this initiative could support further earnings growth.

Miller believes that shares are undervalued at these levels and estimate a burn-down book value of $2.20, including additional asset sales and the DTA benefit. For investors with a high risk tolerance, current share levels below the bear case burn-down book value of $1.50 create a buying opportunity.

Flagstar Bancorp stock rose 4.55 percent to $1.38 in the pre-market trading on the NYSE.

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