Magazine article American Banker

Top Finance Specialist Zeroes in on Income Volatility

Magazine article American Banker

Top Finance Specialist Zeroes in on Income Volatility

Article excerpt

Despite wide swings in interest rates over the past year, Michael R. Hughes has found a way to accurately project earnings for volatile consumer finance companies.

His trick: follow stocks for which the income streams have been insulated against volatility in rates.

Mr. Hughes ranked first among analysts covering credit card and general finance companies in American Banker's first annual Wall Street Sharp Shooter survey of earnings forecasting accuracy, which was conducted by Zacks Investment Research.

Because most consumer and commercial finance companies must finance their lending activities with money raised in the capital markets, Mr. Hughes said in an interview this week, many have become very savvy borrowers.

"Most of the consumer lenders have become prime or Libor (London Interbank Offered Rate) lenders," said the San Francisco-based Merrill Lynch & Co. analyst.

"Fannie Mae and Freddie Mac have become extremely proficient at match funding and insulating themselves from other problems. Commercial finance is the same story: they're mostly prime lenders."

Understanding the significance of this fundamental strategic shift is what has made Mr. Hughes one of the most respected specialty finance analysts around.

Over the last four quarters, his projections ranked first or tied for first among analysts who cover Advanta Corp., MBNA Corp., AT&T Capital Corp., Household International Inc., and Mercury Finance Co.

For the previous five years, his crystal ball ranked tops for earnings of both MBNA Corp. and Beneficial Corp.

"He's been following us for several years and has worked hard to understand the entire finance industry," said Janet Point, vice president of investor relations for Advanta Corp. "He knows a lot of the nuances of the industry and has a good gut feeling for what's really happening."

While many investors have profited from falling interest rates this year, accurately projecting the income for companies in these industries is a different matter. But even if rates were to turn around and start rising next year, Mr. Hughes has more confidence in his earnings projections than he has in the market.

"I would be less worried about my earnings projections than I would about stock performance," he said.

This year was easy he said, because analysts have "recommended everything" under the belief that rates would be declining. Though he issued an upgrade on several financial stocks two months before rates peaked in February, his clients were able to reap the benefit of this year's price rise. …

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