Optimistic About Housing

10/27/2006 12:00 am EST


John Dessauer

President, John Dessauer Investments, Inc.

Naysayers beware: Investment pro John Dessauer has taken a long-term view of the markets and economy and is continuing his positive stance on the housing market. With that in mind, he finds opportunity in a mortgage industry veteran .

"Business Week recently ran a scary cover story: "How Toxic is Your Mortgage", claiming that Option ARM mortgages were dragging home owners down financially and putting the entire economy at risk. An Option ARM mortgage is a very flexible arrangement. Within limits, a homeowner can opt to pay interest only and, in some cases, nothing.

"And yes, the housing boom brought out some crooks and thieves as well as the legitimate lenders and buyers. The return to a normal housing market will squeeze most of them out. But don't take a few cases and jump to conclusion

"In the 19 years we have owned Countrywide Financial (CFC NYSE), I have seen many negative articles based on its accounting. Corporate accounting is complicated, but it is even more complicated with mortgages and mortgage servicing. It is easy, therefore, to conjure up a negative article on Countrywide, based on its complex accounting.

"My response to this charge is straightforward. Look at the cash flow, compared with earnings. If Countrywide has lots of non-cash profits, then its reported earnings per share will be much greater than cash flow per share. In 2005, Countrywide had $4.21 in cash flow per share and $4.11 in earnings per share - more cash than earnings. Countrywide may have some non-cash earnings, but they are more than offset by real cash generation.

"Countrywide says that it will reduce head count to get staffing back in line with market conditions. Since 2003, Countrywide has added 22,000 jobs. Headcount recently was 56,000. I doubt that all 22,000 jobs will be cut. So Countrywide will end up with more employees than it had back in 2003. Countrywide's mortgage production is down 4% so far this year, compared with a year ago. That is far better than the national average and shows that Countrywide is a tough competitor and can add market share when mortgage volumes decline.

"The company says earnings this year will be between $4.00 and $4.80, with a $4.50 estimate most popular among analysts. For next year, some analysts see earnings rising again to $5.20. That does not square with the pessimists, who see a housing collapse and recession. But it does square with the recent up-tick in mortgage refinancing and Countrywide's long history of success in gaining market share. At under eight times median 2006 guidance, Countrywide is an outstanding buy."

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