Despite powerful investor Michael F. Price's recently revealed 7% stake in Advanta Corp., Wall Street analysts remain cool toward shares of monoline credit card issuers.
Only a year ago, the fabulous foursome of monolines-MBNA Corp., First USA Inc., Capital One Financial Corp., and Advanta-were meeting, if not exceeding, all expectations. But their diverging fortunes lately have led analysts to back off the sector.
"The only one we're recommending is MBNA," said Thomas Facciola of Lehman Brothers. Continuing poor credit quality and rising bankruptcies coupled with "lower receivables growth, increased competition, and pricing issues" have prompted the credit card analyst to be "more neutral on the bulk of the sector," Mr. Facciola said.
"It's been a manic-depressive year for the group," said Mark C. Alpert of Alex. Brown. "A lot of euphoria" accompanied Banc One Corp.'s deal to buy First USA and Dean Witter, Discover & Co.'s agreement to merge with Morgan Stanley & Co., he said.
But the giddy mood "inflated other issuers with takeover premiums," said Mr. Alpert. "In the case of Advanta and Capital One, the rug was pulled out from underneath investors."
Advanta rocked Wall Street with news of a $20 million loss in the first quarter. Its stock price went into free fall, dropping more than 50%. Then, Capital One announced lower-than-expected net income in the second quarter, causing its stock price to plummet.
Mr. Price's purchase of Advanta's shares was disclosed 10 days ago in a filing with the Securities and Exchange Commission.
In response, its class A shares rose 12%, to $27.50, and class B shares rose 8.7%, to $25.
But Spring House, Pa.-based Advanta is already a takeover target, so the entry of Mr. Price-who has been a catalyst for deal making in several companies-seemed a nonevent to some observers.
One analyst said the famous fund manager "has been right in the past, but he's not infallible."
Said Mr. Alpert: "If Advanta can convince investors they have a handle on their problems and can get back on track to revenue growth this year or the next, it would make their stock appear undervalued and may attract potential acquirers.
"Until that happens, acquirers will be accused of taking too much risk," Mr. Alpert said.
Analyst David S. Berry, of Keefe Bruyette & Woods Inc., called Advanta "a high-risk, high-return situation," but said he's "more interested in Capital One." Reinstating its "buy" rating last Thursday, Mr. Berry called the Falls Church, Va.-based issuer's stock "really cheap." Mr. Berry estimates the stock will rise to $52 over time.
Analysts generally remain bullish on American Express Co. and are taking a closer look at Providian Corp., the former insurer that has built a large secured credit card business.
And Metris Cos., the partial spinoff of catalogue marketer Fingerhut Cos., is "positioned to capture an increasing share of the credit card market," Susan L. Roth of Donaldson Lufkin & Jenrette said in a report.
"Investors will be looking for higher-quality names or those that offer a little more in terms of diversification," like American Express or Household International, said Mr. Alpert. "If consumer credit quality begins to improve, they will be more likely to move back out onto the risk spectrum to smaller companies with higher growth potential."