Countrywide Not on Easy Street Yet -- Analysts

Investors who thought Countrywide Financial's troubles were over last week when the mortgage-lender received a $2B capital injection from Bank of America got another dose of reality Monday as shares dropped as much as 7% after Piper Jaffray downgraded the shares and Lehman Bros. cut its price target and lowered estimates. The bottom line is that analysts expect the mortgage market will continue to decline. "We still believe tough times lie ahead for CFC in the coming quarters barring a significant drop in mortgage rates," Lehman analyst Bruce Harting told clients as he dropped his 12-month price target to $28 from $30 and sliced his 2007 and 2008 earnings per share estimates to $1 from $2.80 and to $1.55 from $3, respectively. Lehman rates the shares "equal weight." Piper Jaffray cut its rating on the shares to "market perform" from "outperform" and its price target to $23 from $29. Piper expects earnings of $0.84 for 2007 and $2.60 for 2008. Analysts, on average, are expecting earnings, excluding items, of $2.21 for 2007 and $2.96 for 2008. Among items cutting into future profits, according to Lehman, is the fact that an increasing percentage of loans that Countrywide makes will have to be eligible for purchase by Fannie Mae or Freddie Mac. Meanwhile, Harting noted that the Bank of America deal should help stabilize the company's liquidity position and help lower some concerns over solvency but said he believes the investment is more of a strategic infusion of capital to stabilize Countrywide rather than a broader strategic partnership or precursor to a merger. Countrywide shares closed down 4.8% at $20.

Sources: Bloomberg, Reuters, Forbes.com
Commentary: Should Investors Heed the Recession Warning of Countrywide's CEO? • Bank of America's Countrywide Investment: Time Will Tell
Stocks/ETFs to watch: CFC. Competitors: BAC Earnings call transcripts: Countrywide Financial Q2 2007 Earnings Call Transcript

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