Countrywide Comforts Investors ... to a Point

I know what you're thinking -- did he actually sit through the entire Countrywide (NYSE: CFC  ) earnings conference call that ran almost three hours? The answer, fair Fools, is yes.

So why the marathon conference call? And how about that 50-slide presentation that the company cooked up? Well, with all of the upheaval in the housing and mortgage markets, there has been scuttlebutt that Countrywide could be staring down the barrel of bankruptcy. So the idea here is to show everyone that it's not.

So ... is it?
The short answer is no. Although the company lost $1.2 billion for the quarter -- its first quarterly loss in 25 years -- its resources and prospects don't look dire, and investors have rallied to push the stock up more than 30%. In fact, after digesting the earnings report from Merrill Lynch (NYSE: MER  ) , I might even go as far as to classify Countrywide's position as "not terrible" -- which is significant since the stock has recently been priced for terrible.

The lowdown
The next question, then, might be what exactly "not terrible" means. First, it means that the company is not on the ropes as far as access to liquidity. Even after the $1.2 billion loss, the company still has $15.3 billion in shareholder equity, thanks in part to the boost from the Bank of America (NYSE: BAC  ) transaction. Countrywide also pointed out that it borrowed an additional $11.5 billion and arranged for access to another $18 billion in borrowing capacity.

During the conference call, CEO Angelo Mozilo responded to a question about the Bank of America deal by saying that he thought the primary benefit of the transaction was the comfort that it gave to the market, as opposed to the actual cash.

Performance-wise, the company does not expect any quick fix to the market. Management expects continued weakness in the housing market through 2008, an increase in delinquencies and defaults, and continued struggles in the secondary market. The bright side, though, is that it expects to maintain profitability during that time, and the projected ROE for 2008 is 10%-15%. The company expects that the struggles of others in the industry will create more opportunity for Countrywide down the road.

What's not in the numbers
The controversy over Countrywide lately, though, is about more than the crummy housing market and the declining value of mortgage holdings. There has also been a furor over the amount of stock that Mozilo has been selling over the last couple of years as Countrywide's business has gone to the dogs. In response, Mozilo started the conference call with a brief rundown of his side of the story.

While the idea of diversifying his financial holdings makes logical sense, it's still going to be hard for investors not to be very skeptical of the timing of his sales program -- especially as management cheerleads the company's prospects. Closing the conference call was a question exactly to this point. The investor asked Mozilo whether -- with the future prospects apparently so good and the stock price so low -- management was going to start buying stock. Mozilo's response was that he leaves that decision up to each individual on his team; that sounded a heck of a lot like "don't hold your breath."

The Foolish bottom line
It's hard to argue with today's big jump in Countrywide's stock. There were some serious questions hanging over the company and the stock price reflected that. While this report doesn't conclude that they're out of the woods by any stretch, it does suggest that many of the worst-case scenarios investors were worried about aren't in the cards.

Looking at the bigger picture, though, I still can't help wondering what the selling by Mozilo really means. He built the company and it sounds like he believes in its future, so why is it so pressing that he sell the stock just as the price has been tanking? After all, in 2006 he was paid a base salary $2.9 million and received a nonequity compensation award of more than $20 million. How much cash does he need?

I understand that not everybody is Warren Buffett (who simply doesn't sell his vast holdings of Berkshire Hathaway), but it just doesn't seem like a good idea to be a buyer when insiders are such big sellers.

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