FWIW, my club voted to buy some MBNA after I presented the cover sheet and SSG last night. Here's a final version of my cover sheet, with current valuation data.
I bought more myself this morning. I am quite impressed with this company. There is a lengthy article in Fortune about some local squabbles in Delaware between MBNA and the Du Pont folks, but the real take-away for me was the insight into the MBNA culture, which I thought was positive from an investment standpoint.
fortune.com.
- Kris
Cover Sheet
Date May 7, 2002 Company/Symbol MBNA Corp. / KRB
1. Why are we discussing this stock? Almost 80 percent of American households got an average of five credit card offers a month in 2001; what sets them apart? Why is one company a better investment than another if they do the same thing? Last month we heard about COF, that while very similar, may not be as appealing of an investment compared to MBNA. MBNA targets a higher quality of customer with a lower default rate. While MBNA does have a lot of debt, it is less than COF's (46% of capital vs. 68%). COF has been growing faster but MBNA "scores" better in dividend yield, profitability, management effectiveness, and efficiency. Relative to COF, MBNA seems to get more bang for the buck. Its pre-tax income has been growing since 1995 vs. COF's precipitous decline since 1993. MBNA's current price is farther down in the buy zone than COF's and has a better up/dwn ratio.
· MBNA is on S&P's Platinum Portfolio list with 5 stars and VL gives it a 2 rating.
· Member, Forbes 400 Best Big Companies, 2002
· Quicken's 1-click shows MBNA scores better than COF in NAIC, Value, and Buffett screens.
· Manages loans totaling $97.5 bil (2001) vs. $45.5 bil for COF (2001)
· MBNA’s market cap is $29.9 bil vs. COF’s $13.1 bil
· Morningstar Grades -- MBNA: A+, A+, A+ COF: A+, A+, A
2. What do they do and how do they make money? (Crayon Test) MBNA is the world’s largest independent credit card lender and the leader in “affinity cards” for organizations and charities. MBNA focuses on the mid-to-high end credit risk; a typical customer has annual household income of about $70,000. (COF, on the other hand, has traditionally focused on people with patchy or no credit records, and just recently has made a play for “super-prime” customers.)
3. What sources have you checked or provided? The usual dirty dozen.
4. What’s the reason for difference between sales and EPS growth (if any)? N/A, but it is important to note the impact changing interest rates have on the earnings of financial services companies like MBNA, COF, FNM, and WM.
5. Where/what are the anticipated sources of future growth? Like COF, MBNA provides deposit, loan and card processing services. But it appears MBNA has more of a global presence; it recently said it plans to sell credit cards and related products in Spain, its fourth international market. The company currently has businesses in the U.K., Ireland and Canada.
6. If stock price has dropped recently, why? It has dropped $4 from around $39 March 1, on no bad company news that I could find, but there are overall concerns about economy, rising consumer debt, joblessness, pending interest rate changes, and consumer spending.
7. What is the Fair Value (from S&P, Quicken, others)?
· My Graham Fair Value calculation using consensus estimates of $2.60, EPS growth of 16%, and a maximum PE of 8.5 (!) gives a FV of $72, or 94% above its current price.
· Quicken’s Buffett Screen: $54.50 at consensus 18.3% EPS growth
· S&P: $48.20
8. Does the company have a sustainable advantage gained through business momentum, patents, a quasi-monopoly, visionary leadership, a proprietary product, new technology, great management and/or inept competition? Yes, MBNA pioneered ``affinity card marketing,'' linking its credit cards to groups and associations, from organizations as varied as the Magic Johnson Foundation and Britain's Wimbledon Football Club. Affinity card marketing is growing in popularity because they target individual membership organizations and develop a co-branded relationship. These credit card users tend to use the card more and have below average credit losses, as they perceive default as damaging to the organization.
MBNA said it added 2.4 million new customers in the first quarter in what is an increasingly competitive and saturated market. They have the endorsement of 5,000 organizations. In 2001, MBNA acquired 439 new endorsements, including 56 in Europe and 75 in Canada.
MBNA claims superior credit quality because “credit decisions are made by combining sophisticated technology and highly predictive models with the insight of credit professionals. This process allows us to contact the Customer for additional information in order to make the right credit decision. Fewer than half of all applicants qualify for an MBNA card.”
9. Is the company part of a paradigm shift (e.g., connectivity, mobility, interactivity)? No, but Americans love their credit cards, debt, and their organizations!
10. Does the company compete on something other than price? Yes, compared to sub-prime card issuers, they are discriminating and selective in their target audience. They enjoy a lower default rate. They seem to be effective in their marketing efforts, as they added 2.4 million customers in the first quarter in a difficult environment. MBNA’s entire strategic plan is summarized in nine words — Success is getting the right customers and keeping them.
Marketing Highlights:
· 5,000 endorsing organizations and financial institutions with total membership of 160 million.
· The official credit card of the National Football League, Major League Baseball, National Hockey League, NASCAR, United States Tennis Association and the Professional Golfers Association.
· The official card of 600 colleges and universities, including nine of the Big 10 and six of the PAC 10.
· The card offered in 12,000 bank branches throughout the United States and the United Kingdom.
· The card carried by two-thirds of all physicians and dentists, one-half of all engineers and lawyers, and one-third of all teachers, nurses, and architects in the United States.
11. Is there relatively low analyst coverage? No, but there are three less than COF, which has 26.
12. Does the stock have excellent past share appreciation, measured by a relative strength of 90 or higher? No; 44 (Quicken’s Fool screen) and 31 (S&P)
13. Are the Gross Margins at Least 40%? NA Are the Net Profit Margins 10% or greater? Yes; was recently 53% and a 5-yr. average of a stunning 43.6% (vs. 23% for COF) (Multex Investor)
14. Is the future PE less than 30? Yes: 15.6 (Smart Money) Is the PEG ratio below 1.0? Yes: .85 (If not, what is the compelling reason to buy now?)
15. Is the 200-day average on an upward trend? Overall, yes, but flat recently
16. If the stock has dropped suddenly on bad news, have I waited 5-7 weeks for a base to form? Am I sure this is the only bad news? Should I wait till the next quarter’s announcement? If not, what’s the urgency to buy now? No bad news, other than the economy, stupid. |
