actually it's not really a downgrade, as UBS pulled coverage a while back, effectively going from a buy to a "we don't know" <g> briefing shows it as a downgrade as the last stated rating was buy, but that was when the stock was in the mid 40's, so UBS sure got that one right huh?
now they have resumed coverage at a hold, and stated that the stock could be 24 next year based on earnings, or 11 based on more writedowns
isn't that helpful? LOL
one problem with their report is that they state that DRL trades at 1.8X book, which is way off...even after the I/O writedowns, the book value will be in the neighborhood of 13 bucks
basically, like most analysts, they should have stayed with "we don't know"
this stock has been my worst holding by far so far in 2005, so take my opinion with a grain of salt or less, but i think DRL will be back in the 20's by 2006...i actually added a little at 12.98 yesterday
here is the color of the UBS release, for whatever it's worth:
Reinstating Coverage with Neutral 2 Rating -- Many Near-Term Concerns
* We see potential for additional writedowns:
Apart from DRL's estimate of $400m -$600m in I/O writedowns, we believe that
$50m - $75m of the company's mortgage servicing rights (MSR) could be at
risk. Similar to the I/O strips, prepayment speed assumptions used to value
the MSR are lower than U.S and local peers.
* Other concerns also increase risk of more negative news flow:
Apart from uncertainty related to DRL's financial restatement, we are also
concerned about 1) regulatory & legal risk 2) derivatives mgmt 3) interest
rate sensitivity 4) impact of proposed tax hike and 5) limited M&A play on
the company. Negative news flow could pressure the stock, which still trades
at a high P/B valuation (ex I/O writedowns).
* "Cash based' earnings analysis indicates longer-term value:
Ex. noncash gains/losses from Doral's I/O strips, MSR's and related hedges,
we estimate "cash based" EPS (CBEPS) of $1.50, $1.70 & $2.25 in '04,'05 &
'06. DRL's stock could thus be worth $24 in '06 using historical & peer
comps, if current issues are resolved in a timely manner.
* Valuation: $14 PT -- More weight on downside in near-term:
Doral is trading at 1.8x P/B versus 1.0x - 1.5x P/B typical of financial
stocks during periods of investor uncertainty. A P/B ratio in this range
gives an $11 price. A 75% weight towards the downside ($11), and 25% weight
to upside ($24), gives us a $14 12-month price target, and Neutral 2 rating. |
