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Stock Analyst Update

Conseco Turnaround Not Here Yet

Loan delinquency and asset sales problems need further progress.

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What Happened?
Thursday evening, Conseco (CNC) reported third-quarter earnings before one-time charges of $0.15 per share, well below the First Call estimate of $0.23. Conseco's reported income included $489 million in one-time charges. The company also reported that delinquencies over 60 days in its manufactured housing business were on the rise, totaling 1.71% in the quarter, up from 1.47% only one quarter ago. These delinquencies are a leading indicator of trends in future losses on loans. Executives attributed the rising delinquencies to the switch to a centralized collection process.

What It Means for Investors
Although we are encouraged that CEO Gary Wendt is taking action to clean up the mess at Conseco, we still think it's too early to recommend the stock. Many issues remain, including how quickly the company will be able to sell assets to meet its $2 billion debt obligation by the end of 2001. In fact, company executives stated on Thursday's conference call that only about $400 million in asset sales have been completed so far this year.

Conseco's book value of $15 per share may seem compelling when compared with the stock's $6 price tag. But this book value doesn't take into account $440 million in potential liabilities for loans made to officers and directors. Other obligations could creep up too; in particular, more charges could result if assets are sold for less than book value or if additional reserves are needed to offset potential write-offs of manufactured housing loans. Thus, before declaring the turnaround a success, we'd like to see substantial progress from the company regarding asset sales and loan delinquencies in upcoming quarters.

Travis Pascavis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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