The booming market for home mortgages fueled an eye-popping 95% gain in first-quarter profits at
, one of the nation's largest home lenders.
California-based Countrywide posted net income of $326 million, or $2.44 a share, in the latest quarter compared with $167 million, or $1.33 a share, last year. The lender blew out the First Call consensus estimate of $2.08 a share.
While debate rages about whether soaring demand for mortgages and mortgage refinancing is a boom waiting to bust, there's no denying that Countrywide has been a big beneficiary of this surge in home borrowing. Last year, Countrywide rode the wave in consumer borrowing to record earnings, and was one of the top-performing financial stocks.
And this year is continuing that trend. Shares of Countrywide began trading Tuesday at $62.42, up 20% for the year. In recent trading, they were up another $4.73, or 7.6%, to $67.15.
In a sign of confidence about the future, the company said it sees 2003 earnings per share of between $10 and $11. That's much higher than the $7.91 per share full-year earnings expected by Wall Street.
If it earned $10 a share, Countrywide shares would trade at a lowly forward price-to-earnings multiple of 6. Using the Wall Street consensus, the stock trades at a P/E of 8. And based on last year's earnings it trades a multiple of 9 times earnings.
Of course, the question for investors is how sustainable this kind of performance is, especially if interest rates begin rising later this year, as many on Wall Street expect.
For now, however, there's no denying the first-quarter numbers are impressive. The firm's revenue from writing new loans and securitizing them jumped 120% in the quarter to $1.4 billion. In the quarter, Countrywide wrote 682,000 loans, a 101% increase over a year ago.
Overall, the lender's total revenue was $1.5 billion, a rise of 69% over a year ago.
But there are some potential trouble spots in Countrywide's numbers too.
The booming loan business means the firm has had to hire more people. And that's one reason expenses rose 57% to $1 billion.
While Countrywide benefits from low interest rates because it encourages more borrowing, it can also get squeezed by low interest rates as consumers rush to replace higher-paying loans with cheaper ones.
Countrywide, in the quarter, took in $603 million in fees and other income from its mortgage servicing business, a 29% increase over a year ago. But much of that was counterbalanced by a huge $662 million impairment charge on that $502 billion portfolio due to a surge in prepayments.
The company contends that the impairment charges will go down as interest rates rise, because consumers will be less likely to prepay on mortages. But that too is a double-edged sword, as refinancing has clearly been a boon to the company on the lending side.
It's a balancing act lenders like Countrywide have to manage.