Household's Stock Signals Recovery Hasn't Taken Hold

In a sign that the economy and credit quality are still some distance from a full recovery, Household International Inc. has suffered a 16% stock price decline in the two weeks since it reported third-quarter earnings.

Household, which has been regarded throughout the recession as a strong player in consumer loans and credit cards, reported disappointing earnings and an increase in loan delinquencies that sent its stock tumbling $7, to $49.875, on Oct. 31.

Another Dip

On Tuesday afternoon, Household shares traded at $47.75, down 12.5 cents on the New York Stock Exchange.

"Things do not seem to be getting much better in the economy, at least as it is reflected in Household's customer base," said Robert Albertson, bank analyst at Goldman, Sachs & Co.

Consumer credit delinquencies rose to 5.24% in the third quarter from 5.01% in the second, disappointing Wall Street analysts who thought the corner had been turned in June.

Household also doubled its quarterly provision against losses on commercial loans and lost $13 million in that business line as a result. Overall earnings rose 8% from a year ago, largely because of growth in credit card and S&L operations.

Earlier this year, in a major boost for its California franchise, Household bought 48 branches of Imperial Federal Savings Association from the Resolution Trust Corp. That propelled it to 21st place from 60th among California thrifts.

|More of the Same'

"The stock was hurt because it was felt [Household] had advertised a better grip on consumer credit quality than the quarter seemed to show," said Felice M. Gelman of Dillon, Read & Co. "It was more of the same when people had been looking for less of the same."

Household has also been a favorite pick of short-sellers, who sell borrowed stock on the theory that they can profit when a stock declines and can be purchased more cheaply to repay the loan. The "shorts" have viewed the company as a play on the heavy indebtedness of consumers and the weak job market.

Household, based in Mount Prospect, Ill., is a nationwide consumer and commercial finance company and is among the leading credit card lenders through a subsidiary bank. It also owns a life insurance company and runs a savings and loan association in California.

The company, best known for its consumer credit unit, Household Finance Corp., targets middle-class borrowers whom banks ignore. These days, Household likes to style itself as "America's family bank."

Mr. Albertson lowered his 1991 earnings estimate to $5.70 a share from 6.05 and his 1992 estimate to $6.40 from $6.85.

Ms. Gelman cut her expectation to $5.50 this year and $6.20 next year.

Ms. Gelman, who said she felt the quarter was "disappointing but not a disaster" dropped her investment rating on Household stock to neutral from relatively attractive. She expects credit quality to improve in the second half of next year, perhaps earlier.

Mr. Albertson, who said the stock price drop was unjustified, kept his buy rating on it.

He noted that the company had "significantly increased its credit standard in the consumer portfolio" starting in mid-1990. Also, nonperforming commercial loans fell in the third quarter, reflecting an aggressive bid by the company to deal with problem loans by moving them to the foreclosure category.

Contributing to the down quarter, Household's operations in Canada were weaker than anticipated. A two-week Canadian postal strike slowed payments and caused delinquency rates to rise, prompting an $8 million loss in that area.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.