In a research note, however, analyst Robert Lacoursiere cut his price target on the stock to $21 from $31. Shares of Countrywide, the largest U.S. mortgage lender, closed Thursday off 11% at $18.95 after it said it borrowed $11.5 billion from a group of 40 banks due to problems finding money in credit markets. To reduce its reliance on credit markets further, the company said that it would try to originate nearly all mortgages through its banking operation. See full story.
Lacoursiere said the upgrade doesn't reflect any shift in his bearish stance on the residential mortgage market. Instead, the stock price "fairly balances the probability of a conservative worst-case outcome of a liquidity induced distressed asset/breakup sale valued $7.25 against the prospect of a smaller and much less profitable company that we would value at $23.50 today."
Although Lacoursiere warned that "sizable risks remain," he said Countrywide's use of its credit line gives the company breathing room. "As a result we think the possibility of a liquidity induced distressed sale [is] unlikely," the analyst wrote.
Still, the company faces headwinds such as higher financing costs, slipping fundamentals and credit pressures, and Lacoursiere slashed his per-share profit estimates for this year and 2008. "Seeing the potential for a volatile saw-toothed performance as the market reassesses risk and confronts multiple quarters of poor results against deteriorating fundamentals, we do not see this as an opportunity to build a position," he said.
Credit agencies have already lowered their ratings on Countrywide's debt. The uncertainty surrounding the company's future highlights how far the pain that started in subprime mortgages has spread into other home loans that were seen as more secure.
Housing prices are down in many areas of the country, and more borrowers are defaulting as their mortgage rates rise. Several mortgage lenders have gone out of business or stopped originating new loans as sources of short-term financing have dried up. In response to the trouble in credit markets, the Federal Reserve on Friday said it has cut the discount rate to 5.75% from 6.25%.
The stock market rallied in response to the Fed's rare move as Countrywide's shares gained more than 11% at $21.18 in afternoon trading Friday.
Earlier this week, the stock plunged after Merrill Lynch analyst Kenneth Bruce downgraded the shares to sell from buy.
"We fear that the acceleration of margin calls and forced asset sales in the capital markets could lead to more problems for Countrywide to finance its mortgage operations," Bruce wrote in a note to clients Wednesday.
'[A]s as the best-positioned mortgage originator, Countrywide is highly undervalued right now.'
— Erin Swanson, Morningstar
"Should a liquidity event occur, for which the likelihood is increasing, Countrywide shares would probably witness further selling pressure," he said.
Morningstar analyst Erin Swanson in a Thursday note took a more cautiously optimistic tone. After reviewing Countrywide's financial position, "we believe the chances of bankruptcy are remote and the firm will be able to operate through the current liquidity squeeze," the analyst said.
Although the company is facing "unprecedented disruptions" in the mortgage market and won't be able to completely sidestep the near-term pressure, "any earnings hit will not destroy significant value," Swanson said.
"The waters ahead are choppy, and market fear is not subsiding," the analyst said. "However, we contend that as the best-positioned mortgage originator, Countrywide is highly undervalued right now."
"Although the situation is currently dire, we think Countrywide's strategy leaves the company viable over the long term," added analysts at Fix-Pitt Kelton in a report Friday. "Essentially Countrywide is walking away from market-based financing and moving to a more stable source of financing at the bank."
Meanwhile, some are backing the "too big to fail" argument.
"In our view, the odds favor having the government save Countrywide rather than letting it fail," said Stanford Group in a note Friday. "The disruption to the economy would simply be too great."
Jacksonville Bad Credit Mortgage Company Five Stars Mortgage says it is still able to offer 100% Financing in Florida for first time home buyers and clients with challenged credit.