WaMu a Takeover Target

Earnings outlook lowered

June 30, 2004

By PATRICK CROWLEY

WaMu said in the written statement that 2004 earnings will be range of $3 to $3.60 per share, down from $4.21 last year. The company had earlier forecast earnings of hit $4.35 a share.

The news sent the stock plunging $2.84 to $38.47, a drop of nearly 7 percent.

“We’re disappointed in this change in our 2004 outlook,” WaMu CEO Kerry Killinger said in the statement.

“It now appears to us that the shift in the interest rate environment in recent months, with a sharp increase in long-term rates and a related reduction in mortgage volumes, will continue through the rest of the year,” Killinger said.

“The effects of these changes are likely to outpace the timing of ongoing cost reduction plans in our mortgage banking business…(but) at the same time we will remain focused on executing our core middle-market retail strategy,” Killinger said.

WaMu and its subsidiaries had assets of $281 billion as of the end of the first quarter, according to its financial statements. The diversified financial services company says it has more than 2,400 banking, mortgage lending, commercial banking and financial services offices across the country.

Equity analyst Charlotte Chamberlain, who follows the company for Jefferies & Co., characterized the news as an “earnings meltdown” in a conference call with the media.

Chamberlain put the blame squarely on WaMu management and predicted the company’s problems will eventually lead to its acquisition by another company.

“I don’t think this is going to be an independent company in 18 months,” Chamberlain said. “This bad news is great news for investors. It’s the best news in a long time….and it accelerates the timetable in which they get acquired.”

Rapid growth is helping bring the company down, she said.

“It’s a management issue,” Chamberlain said. “They acquired too many companies too quickly and didn’t integrate them and the now operations are under stress because they didn’t take the time to do the integrations as seriously as they should of.”

The acquisition binge created serious problems integrating the servicing systems of the acquired units — and left the company fending off lawsuits and negative press.

A number of other stock analysts weighed in as well, according to NewRatings.com, an online tracker of stock rating activity.

Bradley Ball of Prudential Financial maintains his “underweight” rating while reducing earnings estimates for 2004 and 2005 from $4 and $3.05 and from $4.45 and $3.90 respectively.

“Rising interest rates are exerting pressure of the company’s earnings,” Ball said.

Deutsche Bank Securities has maintained its “hold” on the stock, but also reduced earnings estimates from $4.25 to $3.30 this year and from $4.60 to $4.25 next year.

But Fitch Ratings said the earnings news will not affect is ratings on WaMu, which will stay for now at ‘A’, ‘F1’ and ‘Stable’.

“The decline in earnings expectations is attributed to, among other things, lower origination volumes and narrower gain on sales spreads, combined with (WaMu) not having fully implemented its efficiency initiatives associated with its mortgage banking operations,” Fitch said in a written statement.

“Despite the lower earnings … (WaMu) has managed through the volatile mortgage market over this period and has posted solid results,” Fitch said. “(WaMu) appears to be executing its mortgage banking initiatives of right-sizing its mortgage origination platform … (and) has been successful in building its retail banking presence through acquisitions and de novo branching, creating a consumer franchise beyond its mortgage banking capabilities.”

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: pcrowley@enquirer.com