WALL STREET, CALIFORNIA : Stock Exchange / James Peltz and Michael Hiltzik : EMC’s Data-Storage Story; How Countrywide Rates

Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

EMC (EMC)

Jim: EMC is a company and a stock that perhaps many of our readers have never heard of, Mike, which is a shame, because you could have made a bucketful of money with this outfit.

Mike: I’m sure they’ve all heard of EBay, the online auction site, and the fact is that companies such as EBay are becoming a big part of EMC’s story.

Jim: Right. EMC, which is named after the initials of its founders, makes massive data-storage systems for very powerful computer systems, including the ones that help these Internet companies do their thing.

Mike: Think of it this way: The storage systems made by EMC are bigger, by several orders of magnitude, than the hard disk on your home computer. They’re needed because, as all these “dot-com” companies get more customers and do more business, they accumulate huge databases of information about their customers.

Jim: Not to mention all the other data they need stored just to run the business.

Mike: And the only way to hold all that stuff reliably is to buy a very high-capacity, high-reliability storage system, and the big provider of those is EMC.

Jim: All of this is why EMC seems to kick out 30%-plus revenue and profit growth quarter after quarter. And investors can’t get enough of EMC. The company now has annual sales of around $4 billion, but its stock market value is about $61 billion. The stock has soared twelvefold in just the last three years, and now it trades around $60, or a whopping 56 times its expected 1999 earnings per share.

Mike: But that premium is warranted if you think, as I do, that EMC is the Cisco Systems of data storage.

Jim: I do, and Cisco has a price-to-earnings multiple of 71.

Mike: Let me get back to EBay. Though popular, the Web site is woefully famous for crashing, in part because its data systems can’t handle the load. So it’s turned to EMC for help, and it’s the sort of thing that’s going to happen a lot more. You might not be able to tell today whether EBay or someone else is going to be the auction house that makes all the money, but they’re all going to need companies like EMC.

Jim: Just as they need Cisco to build the networks that link the sites and consumers.

Mike: Exactly. So I think EMC is a major buy.

Jim: So do I, despite the huge gains it’s already chalked up.

Mike: Though we should note that this run-up hasn’t progressed in a straight line.

Jim: Including recently, when it took a hit because of doubts surrounding its plans to buy Data General Corp.

Mike: For those who are interested in computer and literary history, Data General was the subject of a popular book in the 1980s called “The Soul of a New Machine.” Back then it made minicomputers, but those products were eclipsed by the personal-computer revolution. So it turned much of its attention to data storage.

Jim: For mid-size computers.

Mike: Right, it was a market that was under EMC’s radar for quite a while. Anyway, some folks worry that by acquiring Data General, EMC might get distracted from its core business. But I don’t think that’s a problem.

Jim: Another hiccup occurred in this year’s second quarter, when one of EMC’s big resellers, Hewlett-Packard Co., announced it was going to stop selling EMC’s gear in favor of Hitachi’s. That pummeled the stock. But now the consensus seems to be that HP’s switch really won’t hurt EMC’s revenue growth because EMC’s own sales force can handle those accounts.

Mike: There’s even suspicion in the marketplace that, sooner or later, HP is going to come back to EMC on grounds that EMC offers a superior product. Whether that’s true or not, EMC is a company with a monster corporate culture in terms of sales, marketing and service.

Jim: Good point. EMC has an almost maniacal approach to sales and service, which has been the key to its double-digit growth every year.

Mike: Once again, this is a company that I might not want to work for, but I’d like to own a piece of it.

Countrywide Credit Industries (CCR)

Jim: This is the nation’s largest independent home-mortgage lender and servicer, which is a roundabout way of saying that it’s not a bank or savings and loan, right?

Mike: Yes, but like those institutions, it probably breathed a sigh of relief last week.

Jim: You mean because the Federal Reserve didn’t hike interest rates any higher than expected?

Mike: Right, and in fact long-term interest rates seem to be back on their way down. And the story on Countrywide Credit is that, when rates start falling, its profit goes way up. Lower rates cut its cost for obtaining the cash it lends, and it spurs lots of people to refinance their mortgages--at Countrywide’s offices.

Jim: Countrywide, which calls Calabasas home, makes mortgage loans, then tends to quickly sell them to secondary buyers like Fannie Mae. But it keeps servicing many of the loans, meaning it collects and processes the payments for a fee. That’s important, because the fee income helps cushion Countrywide from the vagaries of interest rate changes. Last year, Countrywide originated $93 billion of loans, but it’s now servicing something like $230 billion of loans.

Mike: It’s been a key factor in its success during much of the ‘90s.

Jim: Countrywide has shown good growth, and it now has something like 570 offices nationwide and annual revenue of about $2 billion. The stock did pretty well, too, but not in the last 12 months or so. In that span it’s been on a roller-coaster ride to nowhere.

Mike: Presumably, if we charted Countrywide’s stock price against the rise and fall of interest rates . . .

Jim: . . . They would pretty much correspond.

Mike: And the reason is, of course, that when mortgage rates rise, refinancings dry up, so Countrywide originates a lot fewer loans.

Jim: The stock has been under pressure not only because of actual changes in rates, but because of speculation about what Alan Greenspan & Co. might do with interest rates. In fact, the stock is down nearly 25% just since June 30 because everyone worried that rates were going much higher.

Mike: But as we speak, it looks as though that’s not going to happen. Mortgage rates appear to have peaked and, I believe, are coming back down. It’s a little bit hard to say how fast, but nevertheless rates on 30-year Treasury bonds have come back closer to 6%. So in the next three to six months, I see Countrywide enjoying very heavy business and lots of loan originations, and the stock price will follow.

Jim: Not me. I wouldn’t buy this stock.

Mike: Really? Why not?

Jim: Predicting interest rates is a waste of time, because you can’t. I think Countrywide is a very stout and well-managed operation. But what’s happened in the last year? We had an incredibly strong housing market, good demand for mortgages, and we’ve still got relatively low interest rates despite all the gyrations of late. And look at Countrywide’s stock price. What happens when rates do start moving steadily higher, and housing demand falls off and refinancings dry up? I doubt the stock will move much lower, but where’s the upside?

Mike: Well, I think Countrywide will find a way to exploit all the changes in this interest rate environment and I still think rates are going to move in its favor, at least until the end of the year. If we wait to see how that plays out, Jim, you will miss a nice move in this stock.

Jim: I will note that Countrywide also has moved onto the Internet, and its Web site has gotten good reviews. Borrowers and brokers can use it to get loans, information, rates, you name it. But it’s still not enough for me to buy the stock. I just see the roller-coaster ride continuing, and there are lots of other stocks with stronger growth potential.

Mike: Here’s what will happen: Investors are going to overreact when interest rates bump up here and there, and all that’s going to do is create more buying opportunities for investors in Countrywide. And I think it’s not a bad idea to be one of them.

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Write or e-mail with a stock you would like to see discussed in this column. James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

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EMC

Monday: $59.94

Countrywide Credit Industries

Monday: $32.56