Specialty finance analyst Michael J. Freudenstein of J.P. Morgan Securities Inc. leaves no stone unturned when he forecasts corporate earnings.
The 37-year-old analyst stays on top of his game and ahead of the pack with keen research and a hands-on approach to uncovering what makes an institution tick.
His strategy has reaped dividends, making him the leading analyst in two categories-credit cards and general finance-according to American Banker's third annual Wall Street Sharpshooters survey, conducted by First Call Corp.
In all, the analyst covers 11 companies.
Mr. Freudenstein was given top marks based on his accuracy in estimating the earnings of card specialists Advanta Corp., recently acquired by Fleet Financial Corp.; Capital One Financial Corp.; MBNA Corp., and finance companies including Beneficial Corp. and Associates First Capital.
"We have a lot of respect for Michael, he is very knowledgeable and he does a good job of analyzing the issue and trends," said Dianne Douglas, senior vice president of investor relations at Associates.
"In addition to staying in close touch with the companies I follow, I dialogue regularly with other companies in the industry," Mr. Freudenstein said.
"When an issuer tells you as some did in January of 1996 that they think credit losses are going to come down in the middle of the year and eight of the other nine players in the top 10 are telling you they are not, you know what to discount," he added.
In 1997, with much of the industry consumed with apprehension about credit quality, Mr. Freudenstein said the issue that investors would be most concerned about would prove to be growth.
Mr. Freudenstein said it was not as if he had expected the problems of high chargeoffs and delinquencies to disappear. In fact, he expects a continued deterioration through at least the middle of 1998.
But he said, "In 1996, most of the big players had already battened down the hatches and really increased their efforts to curb credit," and he expected "the velocity of change in credit quality would slow dramatically in 1997."
High credit losses and the high cost of acquiring loans, presented an additional opportunity to grow through consolidation, Mr. Freudenstein said.
"Over the last 10 years, the credit card industry has grown receivables at a compound annual rate of 15% to 17%," Mr. Freudenstein said. "I wouldn't be surprised to see something in the high single digits or low double digits when the final numbers come out for 1997."
A number of transactions last year were of significant size in the industries he covers, including Transamerica Corp.'s sale of its consumer finance unit to Household, and the sale of Security Pacific Funding Corp. to Travelers Group Inc., the analyst said. Delaware-based Beneficial Corp. is also considering the sale of the company, among other options.
"There has been a real change, in the way traditional finance companies are being valued. The value of the branch networks was less appreciated just a few years ago but that is not the case now.
As part of his job, Mr. Freudenstein said, it is important to visit companies in good times and bad.
"Generally when there are problems, people are not banging down their doors to come in," Mr. Freudenstein said.
"I think I have been proactive in pursuing companies after problems arise, going in there and trying to understand what went wrong and what went right," he said.
His visits are welcomed by many company managers.
"Mike is an excellent listener, good adviser, and a very trusted analyst," said James M. Zinn, chief financial officer of Falls Church, Va.- based Capital One. "Frankly, he is the analyst I call first when I have a question or an issue."
"He sees the big picture and is not just a number cruncher as some analysts are," said an officer at one of the finance companies Mr. Freudenstein covers.
"Mike provides a clear picture of where a company is going and he doesn't attempt to stretch the story," Mr. Zinn said. "He is really balanced in his views, both positive and negative."
Mr. Freudenstein, a 13-year veteran of J.P. Morgan, began covering financial institutions in 1992. Before that, he spent six years in the technology and operations group, where he managed the development of financial reporting systems.
After following U.S. and European banks, he moved into the area of specialty finance at the end of 1994.
He holds an M.B.A. degree in finance from Fordham University in New York, and a bachelor's in accounting from Queens College.
The analyst said that, though losses are stabilizing in the credit card industry, they are still high.
He also expects retention costs to continue to rise in 1998.
"Issuers will also need to have more intuitive and anticipatory types of retention systems in order to keep the card in the front of consumers' wallets." Mr. Freudenstein said.
"In the past, when the annual fee came up, cardholders took that as an opportunity to cancel their accounts, but issuers would be prepared for them," the analyst said. "Now, with less cards carrying annual fees, issuers are losing customers through silent attrition."
Mr. Freudenstein said he expects an improvement in the growth of receivables for the industry's leading players.
Pushing that trend, he said is a mortgage refinancing boom that continues to accelerate in 1998.
"It creates an opportunity for consumers to get their balance sheets healthy, and time has shown that when they start to feel a bit better about their personal financial situation, then they go out and spend," he said.
On the buy side, his top picks are MBNA, Capital One, Associates First Capital, Household International, CIT Group, and Greenpoint Financial Corp.-because, among other reasons, he expects them to be beneficiaries of the macro trends affecting the economy, as well as the consolidation sweeping the financial services industry.