Card Fraud Software Firm Back in Favor

HNC Software Inc., a maker of systems that help banks and other companies anticipate and avoid credit card losses, has been one of the best-performing bank technology stocks over the last few months.

Shares of the San Diego-based company, which are traded on Nasdaq, have appreciated more than 30% since the beginning of March. They were dragged down by some negative reports appearing in investment newsletters, falling as low as $18.25 this year. But they're now trading in the $33 range.

Analysts said the rally is no fluke.

HNC "has been our No. 1 pick for a long time," said Wayne Segal, analyst at New York-based Deutsche Morgan Grenfell. "There is nothing fundamentally wrong with the company whatsoever."

Mark Wolfenberger, also with Deutsche Morgan, recently boosted his annual earnings-per-share forecast for HNC by 4 cents to 53 cents (on annual revenues of $84.7 million). He predicts earnings per share of 83 cents in 1998.

Mr. Segal said HNC's stock is one of the beneficiaries of a market that is warming up once again to technology stocks.

Last year, "high-multiple, small technology firms got hit really hard," Mr. Segal noted. But the ones that have probable sources of future revenue growth are being rewarded now.

The bullishness toward HNC is based, in part, on the company's ability to attract new business for its neural network software.

Such software, named for the way it emulates the problem-solving methods of the human brain, makes predictions based on statistical patterns.

Mellon Bank Corp. is one of the most recent customers of HNC. The Pittsburgh-based bank has installed HNC's bankruptcy prediction software, ProfitMax, and plans to use it on about one million credit card accounts.

The software can help to spot trouble "while there is still time to take corrective action," said Ray Duggins, senior vice president at Mellon.

About 100 banks, including 19 of the top 20 in the United States, use HNC's fraud and bankruptcy prediction products. In addition, officials at Deutsche Morgan Grenfell said HNC is on the verge of signing a financial services provider with a portfolio of 17 million credit cards.

Raymond Thomas, HNC's chief financial officer, said HNC is benefiting from the banking industry's recent problems with consumer delinquencies.

But analysts said even if delinquencies settle down over the course of the year, HNC's prospects still are good because credit card use continues to rise. The value of many of the company's contracts rises in concert with the number of cards running on its software.

Also, HNC has some contracts that give it a share of fraud losses that it prevents.

Patricia Campbell, director of marketing at HNC, said the company's flagship software product, Falcon, has helped banks avoid more than $100 million in fraud losses over the past decade.

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