Bank of America and Countrywide

After almost 9 months of absence, this is one topic I had to weigh in on.  First of all, who bought Countrywide w/i the last few months?  How about Washington Mutual?  Anyone?  I wouldn’t fess up to it either; I would, however, fess up to the fact that every investing bone in my body was begging me to do so.  Why?  Numbers.  Strictly numbers.

Countrywide, for example, is trading at about 20% of book value.  In other words if they were to liquidate, selling off all assets and paying off all debts, you could buy what’s left over for 20 cents on the dollar.  So what’s the catch?  Good question.  Countrywide is currently in some hot water as a result of some poor lending practices, specifically those which target customers with below average credit ratings, and correspondingly below average abilities to make good on their debts.  The term “book value” is defined as a company’s assets less their liabilities.  However, with a decrease in home values and an increase in mortgage defaults, the value of the loans that they have made (the majority of their assets) is about to be drastically reduced, which will in turn lower the company’s book value thus increasing the price to book ratio to a less attractive figure.

And now, Bank of America, who does not currently have a huge mortgage lending division, will buy Countrywide for about $4Billion.  What a deal.  Many people are hesitant about this deal and what it might do to Bank of America, but mark my words: Bank of America got a bargain and within the next 7 years, their stock price will reflect as much.  Why 7 years?  Well, we may be on our way into a recession, a time specifically hard on the financial sector.

Why is this transaction going to be so dominant for BofA?  Simple: they sell 6 products to the average mortgage client, and only 2 to the average non-mortgage client.  Can you say synergy?  On top of that, and particularly more important, Countrywide is still the company it was last year.  They’ve got a phenomenal amount of infrastructure in place and they still have an impressive ability generate new loans.  Will they have the same performance that they had over the past 3 years?  Nope.  But look at the earnings they generated during the slow periods of the 80’s and 90’s.  Cut the earnings in HALF if you want, and they still merit a valuation of greater than $10 per share.

My advice?  BAC (that’s BOA) BUY BUY BUY!!!