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Mortgages a Strength for Bear, But 'Headwinds' Pose a Threat

Bear Stearns topped estimates in 2005, and strength in the mortgage securities field helped the company beat estimates for earnings, according to a stock analysis firm.

CreditSights said that "resiliency in mortgages" as well as Bear Stearns' across-the-board strength in credit and interest rate products helped drive strong fixed-income performance.

But while mortgages were a blessing in fiscal 2005, they could be a drag this year, CreditSights said.

The company has a "market weight" rating on the stock of Bear Stearns, citing the "macro headwinds facing mortgages." CreditSights gives the company's stock a price target of $105.

Bear Stearns reported earnings per share of $10.31 in 2005, up 6% from 2004 and $0.19 ahead of a key Wall Street consensus estimate.

In the fourth quarter, net earnings minus preferred stock dividends and other costs increased to $422 million, up 7% on a linked-quarter basis.

The company's fixed-income revenue, which includes mortgage-backed securities business, grew by 13% in the fourth quarter.

"Bear once again demonstrated the breadth of its fixed-income franchise with strength in credit and interest rate products, as well as resiliency in its bread-and-butter mortgage franchise," CreditSights said in a report.

Issuance of collateralized mortgage obligations helped Bear grow its mortgage revenue in the company's most recent quarter, despite challenging market conditions. During the company's fiscal fourth quarter, Bear Stearns generated CMO issuance of $34.6 billion.

The company issued $136.3 billion in CMOs for the full year.

Bear Stearns executives have told investors that it is "not unreasonable" that the company could generate comparable mortgage revenue, citing increased originations in its conduit and residential funding units as well as overseas growth opportunities.

Bear Stearns also cited strength in commercial mortgage-backed securities and home-equity securities.

In addition, revenue from its international expansion increased by 34% from 2004 levels.

While Bear Stearns had a "stellar" fourth quarter, CreditSights expressed concern that the flat yield curve environment and pressure facing the mortgage industry could affect the company's returns in 2006.

The company's stock closed at $120.20 on Jan. 13th.

SNAPSHOT: Bear Stearns' Stock is near a fifty-two week high

NYSE Ticker Symbol BSC

52-Week High $117.25

52-Week Low $91.27

CS Target $105.00

Source: Yahoo Finance and CreditSights

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