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Doral Financial Corporation
Doral - My Jan 07 Take

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By reinhs
April 15, 2005

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Disclaimer: Be careful with your money. It's yours, so do your own research. These are just my opinions, so don't bet your bank on them. Be incredibly careful if you can't put your money into Doral for durations measured in years.

First off, as many have already said, thanks all for the great dialog and all the opinions. I'm not here to look for someone to tell me what to do with my money. I'm here looking for smart experienced people to bounce ideas off of and to hear views that differ from my own in hopes of having something brought up I had just overlooked, or not thought of. That being said, there have been some wonderful dialogs here I've really gained a lot from.

Okay... Since I decided to use options (feels like speculation already) for the first time with DRL, I'm going to talk to predicted price points as of January 2007, since that's the date my options expire on. Since my options are based on a price point I'm giving my percentages based on what general area I think the stock will be in at that time. I make
NO (ZERO, 0) predictions of where it will be between now and then, though I obviously expect the number to approach my predictions the closer the time gets to Jan 07.

Current Price ~$19.50, oops, make that $17.00 since I started writing this last night...

In Jan 07

2% Price < $10 I just don't see this happening. This is a company with very experienced management in times of high interest and low interest. They have a very large stake in the company. It's possible they slipped up a little on the IOs, maybe it's perfectly reasonable. Still though, as long as the Puerto Rico mortgage market doesn't self-destruct and everyone defaults in 2 years, I just can't value the company that low long term. An insane spike that low? That's always possible, but not a long-term thing. These guys are spreading out, starting to make good money in New York, spreading into other forms of banking and doing well there... And honestly, even with the loss on IOs this quarter, they did pretty darn well

5% Price < $25 Even the analysts that started this slide set a target price for $32 to $34 assuming an IO and derivatives disaster. The other analysts didn't agree and put the price much higher. Since then, that analyst has upgraded the stock again! The slide to $20 can only be attributed to mass hysteria and over-reaction. That it not at all surprising in the short term but even if the analysts were right, the companies value is much higher than this and I see people coming to their senses long before the Jan 07 mark. It's been said time and again they have $23 in cash today and they are making money. Even the critics see this as a 1, 2, maybe 3 quarter hit, and only to the IOs, not the other banking sectors or even the Puerto Rico mortgage market.

15% Price < $35 For reference, this ($31) is the point where my options average out to break even. I didn't make money, I would have done better to buy the stock with the money, but at least I made my money back and paid for the options... BTW, I do have a good deal of stock. Don't get the impression my DRL holding is mostly in options; it's just the first company I've used options on. Anyway, this is where the downgrading analysts figured the stock should be worth TODAY if the IOs were really a mess. If they were right, fine. That gives Doral over 1.5 years to get on track. With earnings of over $450 million, even if the growth comes to a neck snapping halt from 52% to 5% for the next 2 years they would still have a fairly low P/E of about 7.5 while paying a good dividend. Still seems too low in 2 years once people come to their senses. BTW, $35 would be a return of 80% in two years from a landslide (66%) fall. Doesn't seem unreasonable at all. This is why I felt comfortable going with options. Chance of losing my money is small in my opinion, but the potential to make a lot more is large. All of my options and Doral shares bought before and after the crash have a break-even point of $33. If we don't hit that by 2007, my options are somewhere between a loss and just okay. I'll probably hold my stock and see what it does depending on company news. If we're above $33 then I'm in the black and smiling again. As of this minute, I'm not very worried, even with some shares as high as $45.

50% Price < $45 This is about the point where two of the Levis family members decided the stock was a good buy ($1M worth each at $43 per share and you think they'd know). This was after the first fall of the stock. This is still under the level that several of the analysts had set price points. Also at this point the CEO and Investor relations were making statements like "We don't understand the drop, this is all a misunderstanding. Our earning announcement contained great news and we were expecting a stock rise!" Granted, that's easy to say but it was said on several occasions and the insider buy backs it up. If the IOs are really a mess, maybe in two years this price will be about right. If the company and 1/2 the analysts are correct, this number will be low compared to where it should be in two years. If the company is flat wrong and the other 1/2 the analysts were right, then maybe this is a good price to be at in two years. Remember, there is hedging to cover the IOs, unless the hedging breaks again, plus everything else at the company (deposit accounts, New York branches, government supported Puerto Rico mortgage market) seems to be going extremely well. If the stock is at $45 in two years (which BTW is still $4 less than it was 2 months ago before a few of the analysts freaked), my stock, options, and I will be stylin'.

50% Price > $45 Heck, we were above this level 2 months ago. The IO mess is an unproven hunch the company is still claiming is a misunderstanding. If it is a mess, there is a good chance hedging will cover better in the future. These guys have been running this company under a lot of different conditions for a lot of years. They know their stuff and I can't think of a single situation where they have lied to me in the past. If indeed they are right, we could be above $50 by late this year. We should be there without a doubt sometime next year. If these guys slow growth from 50% to 20% they will be in the net income range of $650M, just about $6EPS with a good dividend. I tend to believe the company and can't see them not being able to climb back to at least $45 by Jan 07. If that happens then I will at least double my money in that time from where we are today. Again, there are many assumptions being made that the IO scare is real. Most of the lower numbers take that into account. IF (!) it is not real and this has all been worry for nothing, I see no reason at all we can't at least get back to where we were in February, and then some. Even if growth slows to 15%, $50 or better a share in two years doesn't feel expensive at all. That would still be a P/E of less than 10.

All that being said, make up your own minds. When you do, please share your thoughts. I've done my own valuations and I believe in the >$45 slot. I've put a lot into Doral and while this is very painful to watch, in the long run I'm not even worried about the shares I bought at $45. Would have rather seen the money go to shares at $17, but that's the way it goes. My piggy bank is broken, the money is in Doral. This morning I sold off some stocks I'd been planning to sell at a nice long-term gain and put that money to Doral also. While I am breaking my diversification rule some by having a few too many eggs in one basket, if I lost it all tomorrow it wouldn't change one aspect of how I live my life (but that doesn't mean I'd be happy about it!).

Best of luck to all. I think whichever way this goes, this has been and will be a VERY good learning experience that will stick with me for a long time. I don't know if it will be a happy one or a painful one or if I'll be licking my wounds or buying a small airplane, but either way, when opinions vary this drastically and EPS shares go from MASSIVE loss to record earnings, there just has to be a lot to be learned and a very interesting story in the end.

Take care,
Senter - Stretched thin and aiming long


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