Friday, April 13, 2007

Calls of Note Part 3

JMP Securities says that Clayton Holdings' (NASDAQ:CLAY) recent comments suggested that their 1Q revenue estimate is low and that their EPS estimate is achievable despite a perfect storm of cataclysmic events in the quarter for the subprime MBS market. By providing outsourcing services that span the entire lifecycle of a non-conforming mortgage from origination to post-securitization surveillance, Clayton has a unique and dominant franchise within a growing marketplace. Firm continue to believe that the company is poised to emerge from 2007 in a stronger position than it started in terms of Wall Street dealers' market share of securitizations, demand for greater due diligence rates on purchased portfolios, possible special servicing mandates, successful new product roll-outs, and new clients entering the customer mix.

Firm notes that management commented that revenue for the quarter should be a "couple of percentage points" below the first quarter of 2006, which would imply about $53-54 million, versus firm's $48 million estimate. On the gross margin front, they communicated expectations of mid-30%s, not far from firm's 38% forecast. They have two general observations. First, the ability to generate over $50 million of revenue during a quarter when the subprime
securitization market practically shut down attests to the breadth of services and some of the "counter-cyclical" or mitigating trends they see, such as rising due diligence rates. Second, the ability to deliver mid-30% gross margins seems to be a validation of the variable cost labor model that it employs. Specifically, the overwhelming bulk of its employees consist of contractors that are hired on an "as needed" basis to handle deal flow, not full-time employees that burden Clayton with fixed costs.

Notablecalls: See that big fall between March 8th and 13th? That's when the worries about the quarter were spreading. Now it looks as the quarter is just fine. Expect to see a strong interest in the shares today.

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