WaMu Finds a Believer

Howard Shapiro of Fox-Pitt Kelton is the only one of 19 analysts covering the bank to rate it a buy.
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Washington Mutual

(WM) - Get Report

received a fresh wave of optimism after one analyst upgraded the lender's rating to a buy.

Bullish analyst Howard Shapiro of Fox-Pitt Kelton Cochran Caronia Waller raised his rating on the Seattle-based consumer-centric bank to outperform from in-line, suggesting that WaMu could emerge in 2009 as a stronger company, once the loan losses play out.

Shapiro has a 12-month price target of $32 on WaMu. He estimates that WaMu's earnings could range from $3.20 to $4.40 next year, despite posting a net loss again this year.

"Our methodological approach to losses and the company's guidance gives us confidence that the company will have substantially reserved for expected vintage losses by the end of 2008, suggesting a strong upward trajectory to earnings in 2009 and more than adequate capital," Shapiro writes in a research note Wednesday. "The company has a long road to climb, but valuation -- 1.1 times tangible book, a little over 10% implied deposit premium and no value attributed to the rest of the company -- suggests this is a good entry point for long-term investors."

Of the 19 analysts who cover the company, Shapiro is the only analyst who has placed the equivalent of a buy rating on the Seattle lender, according to



WaMu, like other lenders including

Countrywide Financial


, stumbled last year as home prices declined, borrower defaults on subprime and home-equity loans spiked and the secondary markets for mortgage-backed securities seized up. WaMu posted a quarterly loss of $1.87 billion, or $2.19 a share, missing the average analyst estimate by 83 cents a share.

The extended credit crunch forced WaMu into crisis mode. In December, it slashed its dividend 73% to 15 cents a share, raised $2.9 billion in a convertible offering and cut more than 3,000 jobs, and exited the subprime lending business through a restructuring of its home loans unit.

The bank is feverishly ramping up reserves for loan losses to cushion against greater delinquencies on subprime mortgages and home-equity loans. It set aside $1.5 billion in the fourth quarter for bad loans -- approximately twice the level of fourth-quarter net charge-offs -- and plans to take a provision in the range of $1.8 billion and $2 billion for the first quarter.

The difficult position that WaMu is in, despite its extended bread-and-butter retail banking franchise, has some speculating that the company could be ripe for a sale.

But Shapiro adds that while there has been much speculation on the possibility of a sale, WaMu "would be remiss in its responsibilities to shareholders" to sell the company at its current stock price. The deposit franchise alone is worth $16 to $39 a share, he estimates.

And any comparisons between WaMu and the deal Countrywide Financial agreed to with

Bank of America

(BAC) - Get Report

are "only proximate and superficial," he writes.

For its part, WaMu's management team is "absolutely committed to making whatever changes necessary to cede our return to profitability," CEO Kerry Killinger said Tuesday at the Citigroup Financial Services conference.

"2008 is going to be a period of elevated provisioning as we increase our loan loss reserves in response to higher delinquencies and charge offs, however there are some mitigating factors that will help the company through this period including expanding net interest income, stable revenues from our core business and substantial capital," he said. "We will also continue to grow our customer base."

Shares most recently rose 97 cents, or 5.4%, to $18.97.