Magazine article American Banker

Freddie Stock Gets a Rare Downgrade to 'Sell.' (Federal Home Loan Mortgage Corp.)

Magazine article American Banker

Freddie Stock Gets a Rare Downgrade to 'Sell.' (Federal Home Loan Mortgage Corp.)

Article excerpt

In a highly usual move, a Wall Street firm has slapped a "sell" rating on the stock of Freddric Mac.

Gareth Plank, an analyst at Mabon Securities Corp., downgraded his rating from neutral last week, citing unstable earnings.

Freddie Mac and rival Fannie Mae have been sweethearts of Wall Street, and "sell" ratings on the housing finance agencies have been almost unheard of in recent years.

Mr. Plank said Fannie Mae which he rates as a "buy," should not be downgraded.

"We remain bullish on the mortgage industry due to the continuing shift in the market which favors mortgage banks and secondary institutions," he said. "Although Freddie Mac is a meaningful participant in the industry, we believe Fannie Mae will provide superior returns."

Mr. Plank said the primary reason he reduced his rating on Federal Home Loan Mortgage Corp. stock was because of the company's "inconsistent earnings-per-share results and volatile market-share performance."

He estimates that Freddie Mac will earn $4.75 a share in 1994, up from $4.07 a share in 1993, which is pretty much in line with consensus.

The Moban analyst recommends that investors trade out of Freddie Mac shares and trade into those of the Federal National Mortgage Association.

Lack of Consistency Cited

He points out that Freddie Mac shares have advanced 16% year-to-date. That compares with Fannie Mae's 5% appreciation and a 1% advance for the Standard & Poor's 500. In 1993, both companies advanced 3%.

"Lack of earnings-per-share consistency haunts Freddie Mac," Mr. Plank said. "While Fannie Mae is poised to report its 25th consecutive quarterly earnings increase, Freddie Mac is slated for only its third."

He said that Freddie Mac's earnings have shown continued inconsistency. "Both the mispricing of its mortgage-backed security product and its previous aborted foray into multifamily lending have marred earnings per share."

Fannie Mae was the No. 1 company in private multifamily lending and credit enhancement last year with a volume of $5 billion that provided homes for 170,000 families. In comparing the two federal housing agencies, Mr. Plank said that Freddie Mac possesses greater interestrate risk than Fannie Mae.

"Freddie Mac's greater reliance on short-term debt and imputed financing, or float, to fund its retained portfolio can generate increased exposure to interest-rate fluctuations," he said. …

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