Contrary View of Credit Pays off for Card Analyst

Article excerpt

Specialty finance analyst Michael J. Freudenstein of J.P. Morgan Securities Inc. leaves no stone unturned when he forecasts corporate earnings.

The 37-year-old analyst stays on top of his game and ahead of the pack with keen research and a hands-on approach to uncovering what makes an institution tick.

His strategy has reaped dividends, making him the leading analyst in two categories-credit cards and general finance-according to American Banker's third annual Wall Street Sharpshooters survey, conducted by First Call Corp.

In all, the analyst covers 11 companies.

Mr. Freudenstein was given top marks based on his accuracy in estimating the earnings of card specialists Advanta Corp., recently acquired by Fleet Financial Corp.; Capital One Financial Corp.; MBNA Corp., and finance companies including Beneficial Corp. and Associates First Capital.

"We have a lot of respect for Michael, he is very knowledgeable and he does a good job of analyzing the issue and trends," said Dianne Douglas, senior vice president of investor relations at Associates.

"In addition to staying in close touch with the companies I follow, I dialogue regularly with other companies in the industry," Mr. Freudenstein said.

"When an issuer tells you as some did in January of 1996 that they think credit losses are going to come down in the middle of the year and eight of the other nine players in the top 10 are telling you they are not, you know what to discount," he added.

In 1997, with much of the industry consumed with apprehension about credit quality, Mr. Freudenstein said the issue that investors would be most concerned about would prove to be growth.

Mr. Freudenstein said it was not as if he had expected the problems of high chargeoffs and delinquencies to disappear. In fact, he expects a continued deterioration through at least the middle of 1998.

But he said, "In 1996, most of the big players had already battened down the hatches and really increased their efforts to curb credit," and he expected "the velocity of change in credit quality would slow dramatically in 1997."

High credit losses and the high cost of acquiring loans, presented an additional opportunity to grow through consolidation, Mr. Freudenstein said.

"Over the last 10 years, the credit card industry has grown receivables at a compound annual rate of 15% to 17%," Mr. Freudenstein said. "I wouldn't be surprised to see something in the high single digits or low double digits when the final numbers come out for 1997."

A number of transactions last year were of significant size in the industries he covers, including Transamerica Corp.'s sale of its consumer finance unit to Household, and the sale of Security Pacific Funding Corp. to Travelers Group Inc., the analyst said. Delaware-based Beneficial Corp. is also considering the sale of the company, among other options.

"There has been a real change, in the way traditional finance companies are being valued. The value of the branch networks was less appreciated just a few years ago but that is not the case now. …