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Non-Tech : Cityscape Financial (CTYS)
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To: Chris who wrote (849)10/10/1997 9:42:00 PM
From: Rational   of 2544
 
Christopher,

There is another fundamental point that Moody's fails to understand or appreciate. The securitizing companies have an incentive to deflate (not inflate) their "gains on sale" since doing so will cut their income tax liability which is a dead-weight loss. This is the reason for why FASB has forced these companies to realize the gain immediately.

The earnings estimates for these companies are therefore likely to be underestimates (taking advantage of all loopholes of FASB) of true earnings over time. This analysis is rational as long as a company is unlikely to vanish from the scene after inflating earnings, raising expectation about the stock and selling insider holdings (Mercury Finance?). CTYS insiders are here for a long haul. They have sold very little, if any, even when the price was at the peak. Large financing is pouring in. Thus, we will likely see positive future earnings surprises (because of the tax incentive to deflate the current gains from sale) for a company that wants to be a major player over time and increase the value of shares.

Bear, Stearns holds 3.3 million shares. They have just extended the $300 million warehousing facility. Half of the convertible preferred stockholders (April 1997 issue) have already converted into common stock. Other Wall Street players sold off their holdings based on a presumption that such financings would not come. They could be right, but were not because fundamentals of CTYS and its leadership position could lead Bear, Stearn to get deeper into CTYS. I think we have entered at a right time, although I would have liked to get in at 9.5.

IMHO, the stock price will rise as soon as CTYS announces lower loan loss rates and resolution of UK problem. I read Grosser's Sept 9 interview again and found he was emphatic about an improvement in both these fronts.

Sankar
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