Downey Shares Rise on Rumors
Shares of Downey Financial Corp. -- already soaring after two strong quarters -- hit a record high Tuesday amid speculation that the long-independent company might be acquired.
Analysts said the run-up in share prices and heavy trading volume appeared to be driven by conjecture that Maurice L. McAlister, 80, might finally be willing to relinquish control of the Newport Beach-based parent of Downey Savings & Loan.
McAlister, Downey’s chairman, co-founded the company 48 years ago and owns 20% of the stock.
“Clients have called, asking me about rumors that the company might be for sale, but that’s just chatter in my opinion,” said analyst Mark Agah of Portales Partners. “I really don’t know if Mac wants to sell. My standard response is it will eventually be sold -- but I don’t know when.”
McAlister and Downey’s spokesman, Chief Financial Officer Thomas Prince, did not return calls seeking comment.
Downey shares rose 22 cents Tuesday to a record $73.35 on the New York Stock Exchange. That followed a leap of $3.88 on Monday and brought the total increase for 2005 to 28.7%.
Monday’s trading volume of 850,000 shares also was extraordinary, dwarfing the 40,000 to 50,000 Downey shares that typically changed hands daily until a huge surge of trading occurred over the last few months, Agah said. Trading remained brisk Tuesday, at 192,200 shares.
Agah and analyst Paul Miller of Friedman, Billings, Ramsey Group Inc. noted that Downey had reported far better-thanexpected results the last two quarters, as problems in its loan-servicing business subsided and demand surged for its specialty of adjustable-rate mortgages.
The company would be considered an attractive acquisition because of its strong earnings and its network of 170 branches in California and Arizona, Agah said.
Prospective buyers would include out-of-state competitors looking to expand in California, such as U.S. Bancorp, Agah said. U.S. Bancorp executives could not be reached for comment.
Investors also may have been encouraged by recent insider-trading trends. Since the year began, two Downey directors, Brent McQuarrie and James Hunter, together have purchased more than 76,000 shares of the company’s stock. No corporate insiders have sold the stock during that period, a fact some investors would interpret as a vote of confidence in Downey’s prospects.
McQuarrie and Hunter could not be reached for comment.
Downey’s earnings have become less volatile since the thrift decided late last year to sell most of its loan-servicing operation -- the business of keeping records and collecting payments on home loans made by other companies.
And as higher home prices and interest rates have spurred demand for adjustable-rate mortgages, Wall Street has eagerly snapped up securities backed by payments from the ARMs, the analysts said.
The latter factor contributed to stronger results than analysts expected during the fourth quarter of 2004 and the first quarter of this year, Miller said. Indeed, the current environment is a “perfect storm” for Downey, he said, because it’s so easy to originate ARMs and bundle them into securities at strong profit margins.
In the latest quarter, Downey’s profit was $236.1 million, nearly double the $123.7 million it earned during the first quarter of 2004. Excluding one-time items, the earnings amounted to $1.78 a share, said Miller, who had been expecting just $1.18 a share. He currently rates the shares “outperform.”
Agah, who rates the stock a “buy,” said he was so impressed with the last two quarters’ results that he revised his Downey earnings forecast for this year to $6 a share from $4.85, an uptick of 24%.
One option for a would-be acquirer, Agah said, would be to sell Downey’s extensive real estate holdings, which include a headquarters building in Newport Beach that he estimated was worth at least $100 million.
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Financial sector darling
Downey Financial shares soared to a record high this week and have far outpaced most other bank and thrift stocks this year.
Major bank and thrift stocks
*--* YTD stock Company change Downey Financial +28.7% IndyMac Bancorp +16.6% Golden West +2.2% City National ‘0.1% Washington Mutual ‘0.3% Bank of America ‘1.8% Citigroup ‘2.1% Wells Fargo ‘2.7% U.S. Bancorp ‘7.4%
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