New Century Surges on Refinancing Boom
By RAJIV VYAS
Few Orange County companies seem to have benefited as much from lower interest rates as Irvine-based New Century Financial Corp.
The subprime mortgage lender has made a remarkable comeback on Wall Street, thanks to the refinancing boom. New Century has seen its stock rise more than 130% this year in a trajectory uncommon on Wall Street these days.
So far this year, New Century is OC’s best performing stock. As of last week, the company’s shares were trading at around 32 and counted a market value of nearly $800 million.
“I think it was very undervalued to begin with and still is,” said Otis Bradley, director of re-search at New York-based brokerage Gilford Se-curities, which has an office in Irvine.
Even with New Century’s recent runup, the lender is selling for a relatively low price-to-earnings multiple, Bradley said. New Century is trading at a multiple of six, while rival IndyMac Bancorp Inc. of Pasadena is at 11 and Countrywide Credit Industries Inc. of Calabasas is at nine.
Even so, New Century has come a long way. Just two years ago, no analysts covered the company, vs. five now.
“Today we are better insulated than anytime in our corporate history,” said Robert Cole, New Century’s chief executive.
The company has made the most of the home refinancing boom by originating more loans and repaying its own long-term debt. Most of its business is refinancing.
New Century makes loans to people with less-than-stellar credit. Most customers have racked up debt and are living just beyond their means, according to Cole. Many are looking to pay off high-interest credit card debt with equity from surging home prices, he said.
The average interest rate on a New Century loan is around 8.5%,higher than the best going rates but still historically low.
“Plus, they benefit from getting a tax shelter,” Cole said, as mortgage interest is tax deductible.
“New Century (also) is gaining a lot of market share and doing better than anybody else in the industry,” said analyst Bradley, who started covering the company in early 2001.
Back then, New Century was trading at about 8. Bradley said he since has written 27 reports touting the company.
Loan origination at New Century almost tripled in the first quarter vs. the year-ago period. Total loan production nearly tripled to $2.7 billion from a year earlier.
During the same period, the top 10 lenders grew loan production by 85% on an average, according to Cole.
With more loans, the company’s net income was $30.9 million in the first quarter, vs. a $1.8 million loss in the year-ago period. Earlier this month, New Century raised its profit outlook for the year to $5.25 to $5.45 a share, up from its April 25 view of $4.35 to $4.55 a share.
New Century is paying down debt with its profits and cash flow, according to Bradley. At the end of the first quarter, New Century had $98 million in long-term debt, down from $245 million in 2000. In May, the company repaid another $40 million.
“They should be completely out of debt by Labor Day,” predicted Bradley, who said he has revised his projections upward for the company’s profitability some 10 times this year.
“I have never done this (made 10 upward revisions) in my career,” he said.
New Century faces challenges, though. One is keeping up the quality of its loans. In 2000, the company lent to borrowers with an average creditworthiness score of 580. In the first quarter, the average was 600.
The quality of New Century’s loans is key to packaging and selling them to investors.
Two years ago, Irvine-based Consumer Portfolio Services Inc., a then-struggling subprime auto lender, found investors unwilling to buy its loans because of poor credit quality.
Another risk: further economic slowing and a rise of loan default rates. And then there’s the likely prospect of rising interest rates.
“Right now we are in a favorable interest rate environment for the consumer as well as for our company,” Cole said.
An implosion like that seen at Consumer Portfolio Services is unlikely, Bradley contends.
“It was possible two to three years ago,” he said. Today, “their challenge is managing their cash.”
