Freddie Mac has been operating in the shadow of its larger rival, Fannie Mae, in recent months. For better or worse, Fannie Mae has gotten most of the headlines as assorted political battles waxed and waned.
Perhaps the low profile preferred by Leland Brendsel, chairman, is healthy for Freddie Mac, formally the Federal Home Loan Mortgage Corp., because it has been steadily improving its earnings and winning praise from securities analysts.
Early last month, Thomas O'Donnell, an analyst with Smith Barney Inc., New York, wrote: "Among the government-sponsored enterprises, Freddie Mac is expected to show the best comparison versus a year ago. The housing- related GSE should post EPS growth of 11%. It should also benefit from a net interest margin that held up well in the face of rising rates, plus strong investment portfolio growth."
After Freddie reported first-quarter earnings close to his expectations, Mr. O'Donnell took the next step and increased his estimates for the company's earnings for this year and next, each by just 5 cents a share.
"We are also raising our price target to $70 and expect (the shares) to outperform the market," he said. The stock has traded recently for about $64 a share.
The analyst pointed out that the company's retained portfolio of mortgages grew at an annualized rate of 25% in the quarter. "The net interest margin also increased, rising 3 basis points due to a reduction in the size of the lower-yielding tax-advantaged portfolio, ARM repricing within the sold portfolio, and nonearning assets that remained flat while earning assets increased," he wrote.
Jonathan E. Gray of Sanford C. Bernstein & Co., New York, also believes Freddie's stock will outperform the market in coming months. "Freddie Mac appears on track to deliver EPS growth of 14% this year and next," he says.
"The resilience of earnings in the face of declining new loan volume, a compression of the spread on new mortgage investment, and a sharp rise in interest rates has been achieved through 30% growth of the company's retained mortgage portfolio, coupled with a dramatic recovery in float income generated by its MBS portfolio."
At Salomon Brothers Inc., Bruce Harting has a "buy" recommendation on Freddie Mac. He attributed its first-quarter profit growth primarily to strong net interest income and very tight control of overhead.
Like Mr. O'Donnell of Smith Barney, Mr. Harting has set a price target of about $70 for Freddie's shares.
