Thursday, August 10, 2006

Calls of Note Part 2

- Banc of America is negative on Countrywide Financial (NYSE:CFC) after the co reported July monthly Y-o-Y 19% decline in production volume. More ominous for 2H06's outlook was the 19.2% Y-o-Y pipeline decline and the fall in credit report and appraisal activity; which are strong predictors of future originations.

July's negative data furthers firm's concern that CFC's origination volume dependent earnings are meeting growing headwinds from the incipient mortgage origination decline. With modest foreshadowing headcount reductions and Morgan Stanley's (MS) acquisition announcement of Saxon Capital seeming to confirm a deteriorating competitive situation, the firm now foresees increased prospects of management lowering guidance and/or earnings falling below firm's current estimates. That said however, they prefer to wait for more data points before they revise their already below-guidance EPS estimates of $4.38 and $4.64 for '06 and '07.

Eroding earnings visibility has prompted the firm to trim their tgt from $35 to $30. Even with yesterday's 8.7% decline, they think the market has not fully priced in the negative impact to CFC of sustained volume pressure and an eventual corrosion in mortgage credit risk perceptions. With a potential downside of 10%, they reiterate Sell rating.

Notablecalls: I suspect CFC may have some downside in it over the next days or weeks.

No comments: