Magazine article American Banker

2 Finance Company Stocks Called Undervalued @sh#Analysts Say Interest Rate Fears Unfairly Hurting Associates First and Heller

Magazine article American Banker

2 Finance Company Stocks Called Undervalued @sh#Analysts Say Interest Rate Fears Unfairly Hurting Associates First and Heller

Article excerpt

Two major finance companies are taking an unwarranted beating on Wall Street because of the interest rate concerns pummeling bank and thrift stocks, analysts said.

Shares of Associates First Capital Corp., the nation's largest consumer finance company and a major commercial financier, have fallen 27% from their high point in April, and shares of Heller Financial Inc., a leader in asset-based lending, have fallen 30%. The rock-bottom prices have spurred a handful of analysts this month to begin covering these stocks, which are being unanimously touted as significant buying opportunities.

"Every analyst is looking to be a hero, and this presents a very good chance to become one," said E. Reilly Tierney, analyst at Fox-Pitt, Kelton Inc. in New York.

The two stocks have been stung by the general fear among investors that the performance of financial companies will be hampered by rising interest rates. Heller's stock has been trading at roughly nine times its estimated 1999 earnings, instead of what some analysts would consider a more appropriate 13 times earnings. Associates First is trading at about 17.5 times estimated 1999 earnings; Bruce Harting, an analyst with Lehman Brothers, argued that the multiple should be more than 20 times earnings.

In part because of their funding sources, finance companies are not as affected by rising interest rates as banks and thrifts are, and therefore "the way this market is knocking these stocks is unfair," said Jerry Robinson, an analyst with Stephens Inc. in Atlanta.

"These companies' margins don't decline in a rising interest rate environment, or at least not half as seriously as banks'," Mr. Robinson said. "These guys have generally funded their loans at variable rates, so they can adjust easily."

In addition, when interest rates climb, finance companies, unlike banks, tend to gain loan volume, he said.

"If I'm a commercial finance firm, a bank might steal my loan when interest rates are low," Mr. Robinson said, "but credit quality deteriorates at the margin for banks when interest rates climb; not so much for finance firms."

Some analysts said that besides the crushing effect of interest rate concerns on these stocks, the stocks have been tainted by the performance of two other firms in the commercial finance sector: New York-based CIT Group and Finova Group Inc. …

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