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Louis Wilson Fund - Equity Research

By Bernard Ramos,2014-05-14 01:50
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Louis Wilson Fund - Equity Research

    Louis Wilson Fund - Equity Research

    February 25, 2005

    Countrywide Financial-CFC Analyst: Matt McCollough

    PRICE: $35 52 Week Range: $27 $40

    Company Rating: Hold, Moderate to High Risk

    Purchase: 850@$14 Holding Period 3-5 years

    Target sell price: $ 57 Basis for Target Price: Ouma P/BV

    ? Key Factors

    ? Product Strategy- Countrywide is the leading mortgage lender in the nation. Countrywide

    differentiates themselves from their competitors by striving to originate as many mortgages as

    possible and selling them in the secondary market for a gain.

    ? Management- CFC’s management has diversified their revenue stream so that the rising interest

    rates would not present such a problem. Negative factor would be the fact that CFC’s top

    management is very well compensated.

    ? Fit with Economic projections- As interest rates are predicted to rise over the next few years, the

    number of total originations is expected to decrease by 30%.

    ? CFC will expand its servicing portfolio division, as interest rates increase due to the fact that

    profits from the servicing portfolio division tend to increase with interest rates.

    ? Competition CFC dominates the mortgage industry with 13% of the overall market share.

    ? Historical Earnings model- CFC saw a sharp increase in revenues between 2002 and 2003.

    ? Factors driving projections- Rising interest rates are the number one reason for decreasing future

    projections for the mortgage industry.

    ? Growth Potential CFC has the highest % increase among its competitors (70.6% Qtr vs year ago

    qtr) and CFC is among the top performers in terms of Sales (37.56% 5-year annual avg.). On the

    downside CFC has seen a -39.1% decrease in EPS over the past 5 years.

    ? Profitability CFC is beating the industry with an a Net Profit Margin of 16.3% and a 15.3% Net

    Profit Margin over the past five years.

    ? Investment Returns CFC has shown solid ROE (23.1%) and ROA (2.2) over the past year.

    ? Does it fit the LWF strategy? Why? No, CFC is a quality company but I do not believe it fits the

    LWF strategy. CFC is very receptive to volatile interest rates and is reliable on management for

    diverse revenue streams. CFC’s Executives are over compensated, a factor that Warren Buffet

    finds to be important.

    ? Risks Why they may not succeed

    ? Countrywide’s estimates have been lowered due to the fact that a volatile interest rate

    environment will affect mortgage banking industry. Higher interest rates will lower the total

    number of CFC’s mortgage originations forcing them to rely on their servicing fees. ? Competitiveness in the financial services industry could prove to be a major risk to Countrywide

    in that technology and the Internet has increased the consumer’s accessibility to competing

    products and services, while many of their competitors, such as national banks and federal loan

    institutions, do not face the same federal regulations

    ? Financial Condition CFC has a relatively low Debt/Equity Ratio and Leverage Ratio when

    compared to the industry but not when compared to LWF companies.

    ? Why might growth be slower than projected? Increasing interest rates will hinder CFC’s growth

    over the next few years, rebounding by 2008.

? Valuation

    ? CFC’s stock price has increased 300% compared to 5 years ago. CFC saw a major rise in stock

    price during the 2002 and 2003 boom.

    ? CFC’s P/Book Value and P/Sales are solid when compared to their industry as well as the LWF

    firms.

    ? PE HI LO CFC’s PE HI and LO are average in their industry but they do not compare to the

    LWF firms

    ? CFC’s Ouma model used their Operating Income in place of their EBITDA due to the fact that

    their EBITDA was not available.

    ? CFC’s Pro Forma is reconstructed due to the fact that their interest expense is taken out of their

    total revenues

    Recent news:

    ? U.S. Economy: Countrywide should be able to gain market share as the U.S. Economy stabilizes.

    ? Expanding Industry: Increasing competition for lending institutions will result in flattening yield

    curves. th? CFC has seen their EPS drop to $0.56 for the 4 quarter and by 8% to $3.83 for 2004.

    Industry AnalysisKey Points

    ? CFC is beating the industry with an ROE of 23.1 and an ROA of 2.2 over the past year.

    ? CFC is beating the industry with an ROE of 23.1 and an ROA of 2.2 over the past year.

    ? CFC has a relatively low Debt/Equity Ratio and Leverage Ratio when compared to the industry but

    not when compared to LWF companies

    Financial ModelKey Points

    ? Revenue growth forecast is only 3.6% per year

    ? The EBITDA margin is forecast to rise to 44.5% from the current 42%, and is much higher

    than the pre-2003 margins which include Medco (spun-off to shareholders in 2002)

    ? The effects of the loss of sales and profits from

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