Throughout the Federal Reserve's program of monetary tightening, Wall Street has been unloading economically sensitive stocks indiscriminately, selling retail, technology, and financial services.
How then to explain what seems to be a growing infatuation with a handful of companies at the crossroads of the three: the monoline credit card issuers? In an industry as competitive as any in financial services, such companies as MBNA Corp. and Capital One Financial Corp. have emerged as favorites on Wall Street, with analysts touting them as pockets of uptapped value.
At a time when corporate profits are widely expected to suffer from higher interest rates, analysts see strong growth for these standouts.
"We find it very difficult to envision a scenario under which [Capital One] would fail to reach its publicly stated goals of a 20% return on equity and 20% earnings-per-share growth for as far out as most investors are willing to look," said Lehman Brothers analyst Bruce Harting in a recent report.
What sets these companies apart?
In some ways they occupy a psychological sweet spot. Many investors believe the card companies will benefit from an increased reliance by consumers on electronic payments, without necessarily having to invest heavily in development. Likewise, the continued strength in consumer spending has kept their business flowing even as retailers increasingly fight among themselves for market share.
And the monolines enjoy the benefits of being in financial services companies. Hardly a day goes by without some analyst touting the opportunities spawned by industry convergence, consolidation, and cross-selling.
But the real pot of gold, it seems, is the data. The monolines have an abundance of customer information that some say is unrivalled even by the corporate giants in data collection.
"Cap One's customer list and, more important, its ability to cut the data are extraordinary assets, arguably more than the customer base of the telecom companies," Mr. Harting said.
Likewise, MBNA is seen as an exemplar in using alliances to draw on the value of its customer base. In the past few months it has forged partnerships with other financial services companies, including Ameritrade, DLJdirect, and J.P. Morgan.
Among credit card companies, MBNA has been a Wall Street darling for some time. Salomon Smith Barney added the company to its "approved list" of stocks in 1999, and last week Morgan Stanley Dean Witter's top U.S. strategist, Byron Wien, added the stock his firm's model portfolio. The move sparked a jump in the shares.
By forging more complex relationships with customers, the issuers seem to have convinced investors that they have begun to solve one of the long-standing riddles of credit card business: how to retain customers.
With Bank One Corp.'s First USA now showing far less interest in using price competition to court customers, the other industry leaders appear happy to focus more on opportunities among their own customers than in raiding competitors.
Measuring success in cross-selling can be difficult, especially if credit card companies keep to themselves details of how they generate their revenues. But according to Mr. Harting, Capital One is managing to cross-sell a second product to an impressive 57% of its customers within the first year of their relationships.
Ultimately, the attractiveness of the MBNA and Capital One databases may prove so compelling that the companies will be seen as irresistible takeover targets. Or the two companies may decide to begin offering complementary services themselves, as add-ons to their businesses.
But for now, Wall Street seems quite content to have the card companies - at least the ones in good favor - stick to their core business of being gatekeepers to some of the most valuable data in the economy.
