For years the 5% to 10% returns United Companies Financial Corp. earned with its insurance subsidiaries masked the 20% growth of the company's core home equity loan business.
But the sale of its title insurance company late last year and the February announcement of a sale of the life insurance subsidiary have helped the stock recover from $23.50 per share in early January to more than TKTK at Friday's close.
"The stock has lagged its peer group for some time," said John Coffey, an analyst at Robinson Humphrey Co., Atlanta. "The restructuring makes the company a pure play that can be compared to its peers."
While the 35% gain in the stock price since early January has been a boon to investors, the shares are still trading at a discount to the valuations of companies like the Money Store Inc., based in Union, N.J., and Aames Financial Corp. of Los Angeles. Based upon First Call's consensus 1996 earnings projections of $2.84 a share, United is trading at just under 11.2 times earnings, compared with around 16 times projected earnings for its competitors.
John Heffern, an analyst at Natwest Securities Corp., Baltimore, agreed that this valuation difference makes the stock attractive.
"At current valuations, we think investors receive more than adequate compensation for risks associated with an increasingly crowded field" in home equity finance, he wrote in a research report released Thursday. "But a step up in our investment rating will take time and greater conviction that financial surprises have been relegated to the history books."
So far, it appears management is making strides in this direction, he added.
United is optimistic about its manufactured housing operation, begun in November. Likewise, loan originations appear ahead of schedule, in light of a $450 million securitization of home equity loans priced last month, which exceeded Mr. Heffern's assumed $420 million of first-quarter loan originations.
John Hess, a company vice president and head of investor relations, said sale of the insurance subsidiaries has allowed investors to recognize the value of the company's nationwide network. To ensure credit quality is maintained, he said, United has also invested in technology to tighten the connection between its Baton Rouge, La., headquarters and the nearly 150 field offices.
"For the past year and a half or two years, we have been really focused on our lending operations, but nobody really noticed because of our association with the life insurance company," he said. "I think people are beginning to realize the true value of United Companies."
That is not to say investors have not experienced some bumps in recent months. After splitting its shares 2-for-1 in October, United saw its stock price undergo the same gyrations that other consumer lenders experienced.
Investors' concerns about credit quality sent the stock tumbling from $36.25 a share in mid-October to $28.25 in early November. Those concerns continued to pummel the stock throughout December and into early January, when a low of $23.50 was reached.
But as investors become comfortable with the idea that United can avoid the pitfalls of the past, analysts are expecting the stock to approach the valuations of its competitors. Mr. Heffern has given United a target price in the mid-$30s, and Mr. Coffey said it could reach $40 a share by yearend.
"We're just assuming they make up just half the valuation gap," to about 13 times projected earnings, he said.
