TALES OF THE TAPE: Credit-Card Stocks Still Risky Bet
By TARA SIEGEL BERNARD
Of DOW JONES NEWSWIRES
(This story was originally published Tuesday.)
NEW YORK -- Nearly every wallet has one, but consider yourself lucky if your stock portfolio doesn't.
Credit-card stocks have been badly battered over the course of the last year - and while they may eventually reach alluring bargain levels - they haven't yet, analysts and investors said.
The economic outlook for credit-card companies is simply too opaque - and consumer finance stock performance is tightly tied to such expectations. The terrorist attacks of Sept. 11 paralyzed much economic activity, two-thirds of which is generated by consumers, helping to thrust an already wobbly economy into a further tailspin.
What makes forecasting more challenging is the fact that most monoline, or standalone, credit-card issuers went public after the recession of the early 90's, so their performance during a prolonged slowdown is uncharted.
What is clear is that the tragedy "exacerbates a preexisting condition of slower growth, both spending and borrowing, and rising losses," said Prudential analyst Brad Ball, who estimates charge-offs, or losses from uncollectible debt, stand on average at about 6% of total loans outstanding.
That's still below the past decade's peak of about 6.93%, according to Fitch, which tracks the card industry. Charge-offs have gradually risen from a low of 4.93% in September 2000.
Card-issuers now also have more exposure to subprime cardholders, or those with riskier credit histories. "Only in the last five years have these issuers really begun to market cards to this segment," Ball said, "The concern predating the 11th was subprime and is still subprime, but post-11th there is also concern about prime cardholders from a spending standpoint."
Indeed, September retail sales plunged to a lower-than-expected 2,4%, the lowest level since February 1992. That doesn't bode well for plastic, which had already begun decelerating prior to the tragedy and is expected to slow further.
That's not surprising when one considers the staggering rise in unemployment. At the end of September, layoffs stood at nearly 250,000 for the month, with a large part of that stemming from the airline industry, according to U.S. Bancorp Piper Jaffray research. That compares with 47,687 last year and 140,019 in August. The 4.9% unemployment rate has been estimated to climb between 5.6% and 7.0% next year.
Meanwhile, bankruptcy filings, which account for a large chunk of charge-offs, are running 20.59% higher year-to-date. Levels began to moderate after skyrocketing in the spring, when a stream of individuals sought to file before pending legislation made it more difficult to erase their debts. But filings are expected to increase again. The legislation has been put on hold in the wake of the attacks, likely until next year.
So what does this all bode for card-issuer's losses from uncollectible loans - a key factor in profitability? While analysts have said they expect another 10% to 20% rise in losses next year, some aren't even willing to venture a guess.
"Whether it's me or anyone else trying to predict consumer default rates right now, it's impossible," said Anton Schutz, portfolio manager of the $24 million Burnham Financial Services Fund, "It's a fool's game right now and there is very little good work we can do."
Schutz avoided consumer-finance stocks, who losses range from 8% to 74% year-to-date, and other losers: His fund gained about 18% so far this year, while the Standard & Poor's Composite Index is off 16.9% and the Nasdaq Composite lost 31.1% to date. Some of Schutz's top holdings include New York Community Bancorp Inc. (NYCB) and Sovereign Bancorp Inc. (SOV).
"Perception is important and right now the perception is that the consumer is in big trouble," Schutz said, "You have massive layoffs and massive stimulation. Who wins?"
That remains to be seen. But the Federal government's intervention could cushion the economy's fall. The Federal Reserve has already cut short-term interest rates nine times this year. That has helped the card-issuers by lowering their cost of funds, and hence improving the spread between what they earn from interest charged on loans and the cost of funding them. The Federal Reserve is expected to continue its interest rate-cutting campaign, slashing rates again next month. The lower rates have also sparked a refinancing boom which could help improve consumer's finances, by freeing up cash which can be used to pay down debts.
Moreover, the federal government is trying to iron out a $100 billion package, largely tax cuts with some additional federal spending, aimed at helping the hobbled economy.
Several Wall Streeters Still Upbeat On Select Stocks
Despite the uncertainty and dramatic share declines, there is one stock that has managed to eke out a year-to-date gain: Household Financial (HI) is up 2.2%. The diversified consumer-finance concern has improved its portfolio's riskiness over the past couple of years by moving into loans backed by real-estate. The did so with success: now more than 43% of their loans are real-estate secured, analysts said.
"Investors looking to participate in an economic recovery should focus on Household," said analyst Mark Alpert of Deutsche Banc Alex. Brown, echoing the sentiments of several analysts. He said management has been bracing for a recession for the past 12 to 18 months, taking less risky borrowers, focusing on secured lending over unsecured, and adding to its loan loss reserves. The company also has the equity to repurchase its shares, which the monoline issuers to do not, he added.
The rest of the card-issuers' shares have not fared as well by a long shot. Shares of Capital One Financial Corp. (COF) are down nearly 28% year-to-date, while MBNA Corp. (KRB) has lost 13.7% and Metris Cos. (MXT) is off 7.8%. Providian Financial (PVN) and American Express Co. (AXP), who have been hurt by unique company-specific problems as well as the economic slowdown, have clearly been punished to most severely, down nearly 75% and 42%, respectively.
"The stocks were initially priced as if all the companies would follow the results of the weakest companies like American Express," said Credit Suisse First Boston analyst Moshe Orenbuch, "Our thesis was the opposite ... that the strong get stronger and the weak get weaker."
Two stocks he, and several other analysts, would put in that camp include MBNA and Capital One. MBNA's customer based is among the industry's strongest and it's one of the better-poised companies to benefit from the interest rate cuts, analysts said. Capital One's management received kudos for its sophisticated methods in accurately forecasting default rates and consistently executing its growth plan as promised.
Even Schutz, who is bearish on the card stocks, admits MBNA and Household have done a good job in managing their losses thus far. "But we don't know how bad it's going to get," he concluded.
Added analyst Michael Hughes of Merrill Lynch & Co. noted: "The key catalyst for the group is likely to be an early sign of economic improvement rather than something directly related to the companies themselves."
-By Tara Siegel Bernard, Dow Jones Newswires; 201-938-5288; tara.siegel@dowjones.com |
