Profits growing,
Household seeks Wall
Street's respect
By Melissa Allison
Tribune Staff Writer
July 9, 2000
The food is OK, the service is fine and the company can
be delightful.
But one small detail about eating lunch at Household
International Inc.'s corporate cafeteria tends to spoil the
appetite of Chief Executive Bill Aldinger: It's the
electronic sign that continually flashes the stock price.
"There are some days I can't eat down there," Aldinger
says.
For the driven Aldinger, Wall Street's verdict on his
consumer-finance powerhouse goes down hard. Since
taking over an unwieldy financial conglomerate in 1994
and remaking it in a focused and streamlined image, the
former Wells Fargo & Co. vice chairman has received
no satisfaction from investors.
Even when his company makes good money, it has
found itself labeled "out of favor."
In the current climate, making the numbers isn't enough
when you're a subprime lender, a credit card company
or a potential victim of higher interest rates—and
Household is all three.
As the flavor of the month changes on Wall Street, the
Prospect Heights-based giant never seems to make the
menu. Its stock trades at roughly the same level as three
years ago, even though earnings have soared under
Aldinger.
To be sure, many CEOs voice similar complaints about
investors ignoring their solid businesses—even the
bosses of dot-com companies can commiserate these
days. But few have come so far in reshaping their
companies as Aldinger and have so little to show for it in
terms of investor support.
Aldinger isn't about to stop now. And his endurance is
attracting some fans on Wall Street who consider
Household an undervalued gem. Moshe Orenbuch, an
analyst at Donaldson, Lufkin & Jenrette in New York,
has a "buy" rating on Household and says, "They
certainly deserve a higher multiple."
Yet every time Household's stock tries to stage a
comeback, events intervene, and it can't hold above
$50.
The first time it crossed $50, in mid-1998, the Asian
fiscal crisis whacked financial stocks. A year later, credit
card problems at Bank One Corp. took a toll. Then the
Federal Reserve started jacking up interest rates—bad
news for big lenders. Most recently, Household was
tainted by the problems of its competitors in its core
market for subprime loans, those aimed at people with
poor credit.
Now financial stocks of all stripes are under pressure.
"Right now, it doesn't appear that earnings count," a
frustrated Aldinger says. "All I can do is deliver earnings.
I can't make the stock go up."
Aldinger's frustration is understandable, given
Household's growth since he was hired in 1994 to turn it
around.
Soon after arriving, Aldinger unceremoniously
overhauled top management and sold off huge portions
of Household's business to cut costs and help finance
growth in its primary business: consumer finance.
The pieces Aldinger lopped off were the remnants of a
much larger conglomerate built in the '70s.
At one point, Household had 65,000
employees—compared with about 25,000 today—and
was into manufacturing, retailing and rental car
businesses.
"The business grew, but it never had scale. It was
floundering in a lot of ways," said David Schoenholz,
who joined Household in 1985 and has been its chief
financial officer since 1994.
The non-financial areas—which included TG&Y,
Thermos and National Car Rental—were sold or spun
off in the mid- to late '80s.
Aldinger's sell-offs finished the job, returning Household
to its consumer finance roots.
Then he grew the business. In 1998, Aldinger more than
doubled Household's branch system by acquiring
Beneficial Corp., one of Household's competitors, for
more than $7 billion. The company now operates with
two brands: HFC (standing for the old Household
Finance Corp.) and Beneficial.
The new focus, along with Aldinger's careful eye for
numbers—his office walls are lined with printouts of
up-to-date data about the company—has dramatically
improved Household's performance.
This year's earnings are expected to be about $1.7
billion, up from $367 million in 1994, when Aldinger
arrived, and its return on assets is about 2.0 percent
now, compared with 0.8 percent in 1994.
Meanwhile, some subprime lenders have had trouble
making money. The Money Store, for example, is being
closed at a cost of about $2.8 billion to parent First
Union Corp.
"In contrast to some other players, Household's credit
quality is getting better and its revenue growth is
accelerating," Orenbuch said.
Those achievements finally are catching the eye of more
analysts. Household executives blame themselves for not
communicating better with Wall Street in the past.
Looking ahead, Household plans to sell Wall Street on
its vision of expanding its robust core business,
occasionally buying businesses that cater to subprime
borrowers and continually investing in more
sophisticated technology.
Household is the nation's original subprime lender,
formed in 1878 to make loans to working-class families
that were ignored by banks. Because they often have
less-than-perfect credit, Household customers typically
pay higher rates on their loans. Household and other
subprime lenders charge more because they assume
greater risk.
In the end, finance companies tend to make more money
than traditional lenders. But when the economy goes
bad, their borrowers tend to be among the first to
default.
In recent years, the subprime industry has been under
increasing scrutiny from lawmakers, regulators and
consumer advocacy groups who accuse many subprime
mortgage brokers and lenders of gouging and otherwise
harming customers—something they call "predatory
lending."
Household, the nation's largest subprime lender after
Associates First Capital Corp., has defended itself
against people who paint it with the same brush as the
so-called predatory lenders.
On June 20, subprime credit card lender Providian
Financial Corp. warned it expected to pay $300 million
to settle charges that it cheated customers. On June 22,
it was reported that the Justice Department is
investigating whether Associates racially discriminates.
Household executives, who watched the stock approach
the $50 mark again in early June, saw the predatory
lending issue—along with rising interest rates—cut
shares back to the low $40s.
Household issued a release saying it is not under
investigation and that it complies with all federal and
state laws and regulations.
Gary Gilmer, head of the company's consumer finance
business, told employees that Household does not
discriminate and that "such outrageous behavior runs
against our core beliefs, our culture and our collective
sense of decency."
But analyst Gary Gordon at PaineWebber downgraded
Household, along with the stocks of three other
subprime lenders.
"It was nothing they did," Gordon said of the Household
downgrade. "They're in a business the government is
focusing on."
Investors such as Fairholme Capital Management in
Short Hills, N.J., are standing firm. About $150 million
of the $600 million it manages is in Household stock.
Although it may not be reflected in the company's stock
price, Household has avoided many of the industry's
problems.
"There's been a lot of turmoil in the consumer finance
business that has not affected Household," said Keith
Trauner, Fairholme's senior research analyst.
For decades, Household has warned customers against
getting too deeply in debt. In 1956, it produced a radio
jingle to that effect: "HFC says never borrow money
needlessly/But when you must, be sure to go to the folks
you trust."
These days, Household uses technology it says helps to
ensure that customers aren't taking out loans that worsen
their financial condition. For example, it has a computer
system that prevents it from underwriting a loan that
would put a refinancing customer into further
debt—something predatory lenders are accused of
doing.
Household's sophisticated system also parcels out
customer leads to account executives, tracks their
performance on those leads and updates loan forms for
regulatory changes in each state.
The result is greater efficiency and praise, if not a higher
stock price, from Wall Street.
"We knew that Household was moving in the right
direction," the New York hedge fund manager Thomas
Brown wrote in a June report after reviewing the system.
Brown added: "Frankly, it looks like they've already
moved."
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