By: GZ on Lunedì 25 Marzo 2002 19:47
abbonarsi a www.wsj.com
BARRON'S: Homey Value: Countrywide Credit's Shares Look Like A Bargain, Especial
By Andrew Bary
Angelo Mozilo, the longtime chief executive of Countrywide Credit Industries,
spends lots of time trying to convince Wall Street that his firm -- the nation's
fourth-largest mortgage originator -- is a growth company.
He points out that the Calabasas, Calif., company's profits have risen at an
impressive 17% annual rate in the past decade, and that Countrywide aims to
generate 15%-20% profit growth in each of the next several years.
But his efforts, so far, have not been successful. Countrywide's stock, at 43,
is no higher than it stood four years ago, despite appreciable growth in
earnings and book value.
The investment community continues to view Countrywide as an interest-rate
proxy. With rates now rising, the fear is that the torrid pace of
mortgage-refinancing activity will slow and competition will intensify among
lenders, crimping Countrywide's earnings.
That view, however, may be too simplistic. Countrywide now has a more
diversified revenue stream than it did just three years ago, meaning that the
company's profits may not be as vulnerable to higher rates as is widely feared.
"We think Countrywide offers two ways to win," says Bennett Lindenbaum, a
principal at Basswood Partners, a New York investment firm. "It's cheap on its
fundamentals and it's a great acquisition candidate."
Countrywide is worth 55-60 a share based on earnings and book value, and would
command at least 60 in a takeover, Lindenbaum says. He points out that
Countrywide trades for under nine times projected 2002 profits of $4.90 a share
and for a modest 1.3 times yearend 2001 book value of $33 a share.
Jonathan Gray, analyst at Sanford Bernstein, also believes the stock is worth
over 60. "Countrywide trades for 40% of the market multiple. It ought to trade
for 60%," Gray says. The Standard & Poor's 500 now trades at around 23 times
projected 2002 operating profits.
Countrywide, it's worth noting, does share a low valuation with other
mortgage-related stocks. Washington Mutual, the nation's largest thrift, trades
at 33, just nine times estimated 2002 profits. Fannie Mae, at 80, and Freddie
Mac, at 64, trade for 13 times forecast 2002 earnings, despite their long record
of double-digit annual profit growth.
As the country's largest independent mortgage banker, Countrywide has
considerable scarcity value -- and a very digestible current market value of
$5.4 billion. Potential acquirers include Citigroup, which has a limited
presence in the U.S. mortgage market; Wells Fargo; U.S. Bancorp; and several
European banks, including the U.K.'s Lloyds Group, which has Big-Board-listed
shares that it can use for U.S. acquisitions.
Last year, Countrywide trailed Wells Fargo, J.P. Morgan Chase and WaMu in
originations and the size of its servicing portfolio.
Countrywide earned $3.89 a share in 2001, up from $3.14 during its fiscal year
ended in February 2001. The 2001 results are distorted because the fiscal year
included just the final 10 months of 2001: Countrywide moved to a December
fiscal year in 2001, resulting in a truncated reporting period last year.
If Countrywide's 2001 earnings were annualized, they would total about $4.60.
Back in 1992, Countrywide earned just 81 cents a share.
Countrywide has been subject of takeover rumors for several years, but no deal
has materialized amid talk that the 63-year-old Mozilo, who co-founded the
company in 1968, has wanted too high a price. In an interview last week, the
Bronx-born CEO indicated no eagerness to sell, while acknowledging his
responsibility to "realize shareholder value."
"We once were No. 1 in the industry, and we'll look at the alternatives
available to get back to No. 1 and dominate the industry," he told Barron's.
Lindenbaum points out that Countrywide's return on equity, now around 17%,
would be higher under a bank umbrella because Countrywide now must maintain
significantly higher capital than banks do for their mortgage businesses.
Countrywide's fans say that while the company's mortgage originations likely
will fall in 2002 from the record $138 billion in the 12 months ended February
2002, its profits still could increase because of the cash thrown off by its
giant servicing portfolio ($348 billion at last count), as well as
diversification initiatives, including mortgage trading, insurance and banking.
These non-mortgage activities accounted for 22% of Countrywide's profits in 2002
and an ambitious Mozilo is aiming for a 50% contribution from them by 2006.
While Countrywide is perceived as cyclical, there's an inherent balance to its
two main mortgage businesses: loan originations and servicing. Last year,
originations were very profitable, given strong levels of home purchases and
But the servicing portfolio suffered in a low-rate environment. Countrywide
gets a fee of 0.40% of the typical loan balance for servicing the mortgage,
which involves collecting monthly payments and distributing the principal and
interest to the owners of the mortgages and taxes to local authorities.
Countrywide generally doesn't hold mortgages on its balance sheet, as thrifts
typically do. When rates fall, servicing portfolios fall in value because
homeowners refinance mortgages, terminating loans that Countrywide services,
depriving it of fees on part of its portfolio.
When rates rise, loan originations slow, hurting profits, but
mortgage-servicing values increase because of low refinancing activity. With
long-term mortgage rates up to 7% from 6.5% in late 2001, refinancing is
expected to be sharply below the $1.2 trillion last year. Originations for
purchases are seen totaling $800 billion, in line with 2001.
Lindenbaum believes Countrywide's servicing portfolio, carried as a $6 billion
asset on its balance sheet, is conservatively valued at 1.8% of the yearend 2002
loan balance -- below the industry convention of about 2%. Assign a higher value
to the servicing and Countrywide's book value would be close to $40 a share,
versus the reported $33 a share.
Lindenbaum sees stated book value rising toward $40 a share anyway in the next
year, based on Countrywide's expected profits. This means that investors
effectively are valuing the company at little more than its projected 2003
liquidation value -- with no value attributed to the profits from its huge
There are some knocks against Countrywide, including the difficulty in
determining the precise source of its profits. Mozilo calls this a "legitimate
criticism," but says that the company's soon-to-be-released 10-K for 2001 will
provide additional disclosure that should allow investors to understand its
Countrywide does have some exposure to the so-called subprime mortgage market
of credit-impaired borrowers. But Mozilo downplays such concerns, saying the
subprime sector represents only 4% of the company's business.
It's possible that Countrywide won't earn $4.90 a share this year. But the
market doesn't appear to be anticipating anything close to that, let alone the
15%-20% growth annually that Mozilo sees thereafter.
If Countrywide can hit that earnings mark, and therefore show that its profits
aren't rate-sensitive, its stock could easily top 50. And the stock could hit 60
or 65 -- if one of many potential buyers convinces Mozilo that it's finally time
to sell the franchise.
Modificato da - gzibordi on 3/25/2002 19:5:45