Record profits were not enough to discourage Downey Financial Corp.s shareholders from unloading its stock.
On Thursday the $10.9 billion-asset company, which owns Downey Savings and Loan Association of Newport Beach, Calif., reported a 15.7% rise in fourth-quarter earnings, to $23 million or 81 cents a share. Yet its stock plunged 18% that day, in heavy trading, to $43.95, and was selling at $44.5625 at midday Monday. Why the selloff? One explanation could be that per-share earnings were still 9 cents below analysts estimates.
Investors were also caught off guard by the companys announcement of two one-time charges totaling $6.1 million, according to Downey chief financial officer Thomas E. Prince. That included a $5 million adjustment in the valuation of Downeys servicing rights on mortgage loans sold to other banks. The company expects to lose some of those loans when borrowers refinance their mortgages because of the Federal Reserves recent cut in interest rates.
These items were not included in the analysts expectation of earnings per share, and to the best of my knowledge that is what prompted the move in the stock, Mr. Prince said.
Moreover, one analyst said investors may have decided to act before the Fed lowered interest rates further many on Wall Street think that rates will be cut as many as six more times this year.
I think thats why the stock went down as much as it did, said the analyst, who requested anonymity.
Nevertheless, he said, investors overreacted.
Was the stock deserving of a flat yield? I think it was, he said. Was it deserving of a 20-point haircut? Not at all. This is a very good company. During the last recession in California, from 1990 to 1994, only two thrifts in the entire state didnt lose money Downey State and Golden West Financial. And thats because they are very conservative.
Laurie H. Hunsicker, an analyst at Friedman, Billings, Ramsey & Co., agreed.
The reserve Downey took is not cash out the door, but conservative accounting, Ms. Hunsicker said. It is a precautionary step in the event of a potential prepayment. In the worst-case scenario, where Downey would lose all of the loans that it has been servicing, earnings per share would drop 85 cents not the near $10 correction that we saw Thursday. That was completely unwarranted.
Ms. Hunsicker predicted that Downeys stock would rebound at least 15% over the next week, as investors realize that the company is fundamentally solid.
Asset quality remains high. They have strong loan and deposit growth, and margins are widening, Ms. Hunsicker said. She noted that if Downey had reported operating earnings that do not take one-time charges into account, their earnings would have been off analysts consensus by 1 cent. I think the stock will rebound once people dig a little bit more.