Countrywide Analysts Not Convinced of Quick Turnaround

October 29, 2007 No Comments »

Just days after Countrywide stock surged on news that profits would return as soon as the fourth quarter of 2008, some analysts covering the struggling mortgage lender expressed doubt.

Friedman Billings Ramsey cut its price target on Countrywide Financial by $5 to $20, citing high credit costs and a soft housing market.

Friedman analyst Paul Miller Jr., who retained his “market perform” rating on the stock, said he remained cautious about all mortgage names, not expecting stabilization in the industry until late 2008 or early 2009.

“Management expects to return to profitability in 4Q07 and generate a 10 percent to 15 percent return on equity in 2008, but we remain cautious about the outlook given the continued weakness in the housing market,” wrote Miller in a note to clients.

That outlook matches earlier predictions made by the Mortgage Bankers Association and the S&P who believe home prices will likely fall until 2009, stifling loan origination as defaults and foreclosures rise.

Goldman Sachs analyst James Fotheringham raised his price target by a buck to $18, but kept his “sell” rating on the stock.

“Acquisition speculation poses the greatest risk to our negative view,” Fotheringham said.

After earnings were released Friday, Chris Brendler of Stifel Nicolaus & Co. Inc. said, “I still remain concerned about the potential for another credit write-down and just how profitable this business will be, even after they get past the credit headaches in the near term.”

Meanwhile, Standard and Poor’s lowered Countrywide’s credit rating from an “A-“ to “BBB+” and kept the lender on negative credit watch, though still at investment-grade status.

Shares of Countrywide were trading down 87 cents, or 5.03% to $16.43 on the news in midday trading on Wall Street.

Countrywide shares surged a whopping 32.4% Friday to close at $17.30 after the lender announced a loss of $1.2 billion and a quick return to profitability, though shares still remain 59% below summer highs around $40.

Barron’s columnist Randall W. Forsyth referred to the rally Friday as “a touching display of faith-based investing” given the huge losses, continuing turmoil, and lack of confidence (stock sales) from its number one Angelo Mozilo.

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