The market is not giving enough credit to credit card companies, concludes a report released Tuesday by Sanford C. Bernstein & Co.
Analyst Moshe A. Orenbuch said in the report that First USA Inc., MBNA Corp., Advanta Corp., and Capital One Financial Corp. were undervalued because investors have failed to take into account the companies' "franchise" value.
"Don't get me wrong," said Mr. Orenbuch, "the stocks are cheap" relative to earnings per share, "but they are incredibly cheap when you valuate the companies on a price-to-receivables basis."
Mr. Orenbuch has buy ratings on all four companies, and singles out First USA as a "favorite." He has a $75 target price on the stock, assuming the valuation rises to only 13% of receivables. The shares rose 37.5 cents on Tuesday, to $58.
Mr. Orenbuch noted Bank of New York's plans to sell its $3.4 billion portfolio to Household International for a premium of $575 million, or 17% of the portfolio's receivables. He argued that if the credit card specialists were valued at 17% of receivables, their stock prices would increase as much as 40%.
Capital One's shares scored the most dramatic gain among the card companies on Tuesday, rising $1.375 to $31.
MBNA shares fell 87.5 cents to $28.625. Advanta's Class A shares fell 87.5 cents to $53.75, while its Class B shares fell 50 cents, to $49.25.
Analyst David S. Berry at Keefe, Bruyette & Woods Inc. also has a "buy" rating on the Capital One. Although the company's write-offs have been on the rise, he said, its heavy investment in marketing should pay off.
Capital One's has experienced explosive revenue growth as teaser rates expired, Mr. Berry pointed out.
In other news, Wilmington Trust Co. shares rose 25 cents to $33.75 on trading volume almost three times the daily average. At 11:40 a.m. a block of 300,000 shares was traded. Analyst Harold R. Schroeder of Keefe, Bruyette & Woods attributed the burst in volume to the company's new buyback program.
"In the last eight or nine years, this company has bought back an average of 785,000 shares per year," he said. "They are a company that actively trades."
Separately, a larger than expected drop in housing starts, as reported by the Commerce Department, indicated that interest rates are slowing down the economy.
Despite the news, the Standard & Poor's bank index fell 0.22%, the Dow Jones industrial average fell 0.44.% and the S&P 500 fell 0.47%.
Some of the bigger gainers of the day included Bank of Boston Corp., up 37.5 cents to $49.125; Keystone Financial, up $1 to $33.625; and First Chicago NBD Corp., up 75 cents to $41.625.
Decliners include NationsBank Corp., off 75 cents to $82,125; Signet Banking Corp., off 75 cents to $25; and Mellon Bank Corp., off 87.5 cents to $57.75.
