Shares of Money Store, United Companies, and Contifinancial Corp. have recovered after a free fall in the subprime lending sector this year, to prices about 80% of their all-time highs.
While other lenders to people with imperfect credit have continued to languish on the stock market, some analysts say these mortgage companies- which have not reported credit-quality problems-have become targets for banks and thrifts hoping to build their presence in the subprime market.
"The level of interest coming from banks is very noteworthy," said Brenda B. White, managing director of UBS Securities.
E. Reilly Tierney, an analyst at Fox-Pitt, Kelton, said the price of these companies remains attractive to an acquirer. "Even the best companies in the business are not trading at multiples above regional banks," he said.
The entire subprime sector crashed after a handful of auto loan specialists, including Mercury Finance Co. and Jayhawk Acceptance Corp., revised earnings downward, citing accounting irregularities.
But a clear bifurcation has now developed among the subprime stocks, Ms. White said at a mergers and acquisition conference in New York sponsored by American Banker and the Strategic Research Institute.
Ms. White said companies such as Aames Financial and Cityscape are trading at a fraction of their highs but that acquirers may not see them as bargains. Both have reported problems that might scare away more conservative banks.
Aames, for one, has hired Donaldson, Lufkin & Jenrette to look into a sale, but the Los Angeles lender's stock has been hurt by concerns about increased prepayments.
One sign that subprime is not a bad word, however, is the welcome given by the market this year to initial public offerings by several subprime companies.
Life Financial and New Century Financial each went public at $11 a share in June and were trading Wednesday at $19.25 and $17.25, respectively.
But banks need not limit themselves to the publicly traded subprime lenders, Ms. White said.
"One of the best approaches on the subprime side is going for private companies that are looking to go public," she said. Private companies in need of capital often prefer the liquidity created through being acquired by a larger company.
Champion Mortgage Co., for example, had filed to go public this year but was acquired by KeyCorp before the initial public offering.
Glenn S. Goldman, co-president of Contifinancial, which has acquired minority stakes in several subprime lenders this year, said his company has not had much competition yet from banks.
Mr. Goldman predicted continued consolidation but maintained that subprime companies, generally more entrepreneurial in character, might not be as willing to sell themselves to large banks as they would to larger subprime lenders.
