Salomon Brothers Inc. has initiated equity research coverage of credit card and other consumer finance companies.
The firm, which is poised to merge with Smith Barney & Co., has hired consumer finance analyst Michael P. Durante away from Prudential Securities and issued its first stock recommendations.
Salomon assigned a "strong buy" rating to MBNA Corp., calling it a "credit card marketing machine (that) skims the cream of the card-borrower crop through product diversification." It gives the same rating to AmeriCredit Corp., a subprime auto lender.
Associates First Capital, Beneficial Corp., and Household International were rated "buy." Salomon's report called Beneficial "perhaps the most undervalued retail consumer finance franchise around."
"Hold" ratings were assigned to American Express Co., Capital One Financial Corp., Credit Acceptance Corp., and Union Acceptance Corp.
"We've seen a significant deceleration in consumer credit growth," Mr. Durante said. "We think that going forward, consumer credit growth is going to be a little harder to come by."
Mr. Durante said the past four to five years have been an "expansion period" for the consumer credit industry, and it is over.
On the bright side, he said he foresees a "marked improvement in credit quality in the next couple of quarters" as consumers scale back their spending.
On the down side, this phenomenon will "make it much tougher for credit card companies in particular and other consumer lenders to grow their portfolios."
In light of these trends, Salomon is advising investors to "buy the very best consumer franchises out there, the ones with the best products and the best distribution, because they will have less of a tough time growing their business in a slower cycle," Mr. Durante said.
Salomon is also predicting prosperity in card products for American Express, despite the "hold" rating assigned to the company. American Express' card business is "poised for accelerated growth, while the mutual fund business may be subject to less predictable capital market conditions," Mr. Durante writes.
Moreover, if American Express triumphed in its antitrust-related battle against the bank card associations, Mr. Durante wrote, "our current forecast for compound annual growth of 13% in worldwide card billed volume could prove low."
