A look at certain stocks in the mortgage sector.

Author:White, Brenda B.
Position::Deal Talk - Letter to the Editor

TO COMMEMORATE THE FIRST ANNIversary of this column, I thought it appropriate to examine "The Ticker," the page that appears opposite Deal Talk every month.

Each month we see the current prices of the companies in the mortgage sector, and their 52-week highs and lows--but not the information that would allow the reader to put these prices in historical context, as well as in relation to their peer group within the mortgage industry.

In order to present such information, we first need to break the companies in the mortgage sector into sub-sectors. Of course, no categorization is ever simple; there is always overlap. The stocks on the opposite page can be categorized as follows: government agencies, mortgage real estate investment trusts (REITs), mortgage companies, thrifts, commercial banks, mortgage insurance companies and financial technology companies.

Let's start by looking at government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. The numbers indicate that Freddie is trading at a higher multiple of both 2005 and 2006 estimated earnings than Fannie. Comparing them with certain commercial bank stocks, we can see that Wells Fargo & Co., J.P. Morgan Chase & Co. and Bank of America are all at higher multiples of 2005 and 2006 earnings estimates. If we look at the historical earnings multiples of the agencies (prior to the accounting problems disclosed by the GSEs), we would see that the reverse was true: The GSEs always traded at earnings multiples that exceeded those of commercial banks. Relative to each other, Wells Fargo is trading at richer earnings multiples than the other two comparable commercial banks.

Recently the gap in valuation between thrifts and banks has tightened significantly. Contrary to historical trends, where thrifts were valued at a discount to commercial banks, they are currently valued at similar levels to commercial banks--if not at a slight premium (see Figure 1). This convergence can be attributed to many factors, including a shift in the business models of a growing number of thrifts.

Comparing the thrifts and banks with the mortgage banks and mortgage REITs reveals that, in general, both thrifts and banks trade at earnings multiples that exceed mortgage banks and mortgage REITs. Currently, many mortgage companies that are public or planning on going public are attempting to acquire banks and create retail bank branch networks. Mortgage REITs have become popular as a way for mortgage companies to enjoy...

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