Countrywide Financial: Past the Media Hype

| About: Countrywide Financial (CFC)
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In the past few months I have written extensively about Countrywide Financial Corp. (CFC) and received quite a bit of feedback. Some of the feedback was rather, ah, ummm... testy! I recommended the stock at $34 only to watch it fall to $32 and the questioning came. Well, the stock is now at $41 with a fair bit of momentum behind it. I will not take a victory lap here at $41, because my price target of $50 is still a ways off. So what's happened and what's changed?

In late February to mid-March, the investing world was gaga over the subprime mortgage "crisis." I wrote then, and will continue to say, it was not and is still not a crisis, but an issue. Countrywide Financial is among the largest issuers and service-providers of residential mortgages in the United States. Countrywide does have its share of subprime customers as it was among the most aggressive marketers of these type of mortgage programs.

Countrywide Financial attempted to calm the waters during that time-period. Nonetheless, the company's shares fell hard despite the lack of hard evidence that subprime was going to undo the entire mortgage market structure. It was an exaggerated situation and thousands of nervous shareholders shot first and asked questions later. Typical media hype surrounded this stock.

Countrywide finally had its day in court when it reported its financial results. Sure enough, subprime was an issue, not a crisis. The company took its hit, reduced forward earnings estimates for this year to $3.85 earnings per share and quietly endorsed next years earnings per share at $4.60-4.65. Revenues will be $11.1 billion this year followed by $12.5 billion next year. The stock has bounced back very nicely to $41, which is slightly above a 10 times price-to-earnings multiple for this year and under 10 times next year.

The company has another external dynamic working on its share price: a possible takeover. The founder/CEO is 68-years of age and may find it agreeable to merge with a larger player such as Merrill Lynch (MER) or Bank of America (NYSE:BAC). With subprime accounted for and earnings adjusted, the slate is clean and neat for this possibility. Both Merrill Lynch and Bank of America have their sights set on becoming more dominant in the mortgage market.

Countrywide announced their intention to add about 2,000 new sales people to its already 15,000 force. As lesser players are exiting the mortgage game, Countrywide is taking advantage of the disruption. Management also indicated its intention of offering a 50 year mortgage for sub-prime customers.

Whatever happens, Countrywide Financial has weathered this storm and the opportunity to buy the shares at $32-34 are long gone. But the stock is still a terrific value here at $40-41.

CFC 1-yr chart