Analyst is Skeptical About Countrywide

Analysts at Friedman Billings Ramsey have downgraded their rating on the stock of Countrywide Financial Corp. to "market perform" from "outperform."

Analysts Paul Miller, Annett Franke and Steve Stelmach said the lower rating reflects the recent increase in Countrywide's valuation rather than any deterioration in the business.

But they advised investors that Countrywide's recent stock repurchases may do little to bolster earnings per share in 2008, citing volatility in Countrywide's earnings stream. Adjustments to the valuation of mortgage servicing rights and gain-on-sale margin compression could eat away at any accretion from Countrywide's recent and future share repurchases, the FBR report said.

Despite lowering the rating on the stock, FBR maintained its $42 price target for Countrywide's shares. That represents 11 times the analysts' projected 2007 EPS for Countrywide.

The analysts also said that investors should "watch out for leverage," noting that Countrywide's mortgage servicing right asset is valued at 117% of capital. And given recent buybacks, the MSR to equity ratio may now stand at 130%, according to FBR.

"The higher this leverage ratio, the riskier the equity base, and investors will begin to put a lower valuation on the stock," FBR's report said.

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