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Bear Stearns' advice was timely. Only four days later, on April 9, citing changing conditions in the market for mortgage-backed securities, AHM lowered its March quarter and full-year earnings forecasts by 55% and 25%, respectively, and said it would cut its next dividend by 38% to 70 cents per share.
On that news, Deutsche Bank, Friedman Billings and Lehman Bros. cut their ratings to "hold," "market perform" and "equal weight," which all basically translate to "hold," which, again, many pros interpret as "sell." Citigroup, already at "hold," actually did cut its rating to "sell."
With the stock trading at around $22, Citigroup cut its target price to $19, Deutsche cut its target to $24.50, and Lehman cut its target to $20.
Unsafe at any price
Incredibly, on April 11, with American Home shares trading at around $22, A.G. Edwards, citing its safe dividend, upped its rating to "buy" from "hold."On April 30, with its share price back up to $25 or so, AHM announced March quarter earnings of 54 cents per share, below the year-ago $1.02, but above the 46 cents that analysts expected.
On May 1, in a public offering, American Home issued 4 million new shares at $23.75. Citigroup, which had set a $19 target price for American Home shares on April 5, handled the offering. Also, on May 1, A.G. Edwards, citing valuation, cut its rating on American Home to "hold." American Home closed at $23.15.
On June 28, the company said it was establishing additional reserves for delinquent loan repurchases, would likely experience a loss in its June quarter and withdrew its guidance (forecasts) for 2007. American Home closed at around $20.91.
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The next day, Friedman Billings threw in the towel, cutting its rating to "underperform" and cutting its target to $15. Standard & Poor's, noting that it believed the dividend secure, cut its earnings estimates but kept its "buy" rating. American Home closed at $18.38 that day.
On July 18, with American Home now trading in the mid-$13 range, Lehman Bros., noting that American Home might cut its dividend again, reiterated its "hold" rating.
Two days later, RBC Capital, still rating American Home at "outperform," said it expected the mortgage maker to generate sufficient income to cover a 60-cent-per-share quarterly dividend. RBC did lower its target price to $20 from $25. AHM closed at $12.80.
On July 30, American Home, citing unprecedented disruptions in the credit markets, said it would delay its next quarterly dividend. JMP Securities, Lehman Bros. and Standard & Poor's cut their ratings to versions of "sell," while RBC Capital cut to "sector perform" from "outperform." AHM closed at $10.47.
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On July 31, American Home, in essence, said it had run out of cash, couldn't pay its loan obligations and wasn't able to borrow more funds. American Home said it had hired advisers to assist in evaluating its options, which included liquidation of its assets. Its share price closed at $1.04.
On Aug. 1, RBC Capital Markets reiterated its "sector perform" rating.
On Aug. 2, American Home fired most of its employees. The next day it stopped accepting mortgage applications. And on Aug. 6, it confirmed that it had filed for Chapter 11 bankruptcy.
Don't trust -- verify
While analysts can provide valuable information, the scenario I've described illustrates the necessity of doing your own research and making your own decisions.Since American Home required no substantiation of a borrower's income, it seems reasonable that some borrowers would overstate their ability to pay. Although American Home sold its mortgages to investors, it was still responsible for making good when buyers defaulted. Thus, it's a reasonable assumption that its business would suffer when home prices weakened, taking away the option of selling to get out from under unaffordable payments.
American Home was still trading in the mid-$20 range when it reported its March quarter results on April 30. That report, which described the deteriorating market conditions that the company was facing, should have been a screaming sell signal for any shareholder who took the time to read it.
At the time of publication, Harry Domash did not own or control shares of companies mentioned in this column.
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