Thomas K. Brown of Donaldson, Lufkin, & Jenrette on Monday annointed Capital One Financial Corp., Signet Banking Corp.'s credit card spinoff, his pick of the year of '95.

The banking analyst -- one of the first to take note of the rapid growth in Signet's card business two years ago -- sees Capital One as a case of the market's inability to differentiate within the credit card group.

The unit went public on Nov. 16 at $16 and has dropped to the $14 range amid fears of higher interest rates, which have dragged down the financial services sector in general.

"The marketplace has said there is increased competition with the higher interest rates" and has bailed out of credit card companies indiscriminately, said Mr. Brown.

"There are 300 issuers of credit cards for whom the [current market] is not going to be good." Mr. Brown said. Capital One, he predicted, will be the category buster.

Early next year, when Capital One completely cuts the cord from Signet, Capital One will join Advanta Corp., First USA, and MBNA as one of only four credit card specialty organizations.

While Mr. Brown is bullish in general on these four credit card specialists, he thinks several management and financial characteristics differentiate Capital One from the group.

"The credit card business used to be a mass market," said Mr. Brown. "Now the specialists have gone to mass customization."

As a part of Signet and now on its own, Capital One has used data base marketing techniques to target profitable customer bases, reducing the cost of account acquisition and servicing.

The unit has been able to expand its business largely through its long-duration teaser rates.

To lure customers, Capital One currently offers a teaser rate that lasts about 12 to 16 months, which is almost double the six- to nine-month teaser option offered by competitors. When the teaser expires, consumer rates rise.

Next year, $3.1 billion of the company's $6.8 billion of outstanding receivables will reprice upward to about 14% to 15% from the current 6.9% rate, said Mr. Brown. Based on Mr. Brown's pershare earnings estimate of $2.25 for 1995, Capital One is now trading at about 6.2 times next year's earnings.

To be sure, there are other analysts who do not share Mr. Brown's bullish sentiment for Capital One. Even the underwriters' group has a more conservative $1.85 earnings estimate for next year.

Also, analysts think earnings will be affected in the next year by a $2.5 billion bridge loan that Capital One took out to fund its receivables until it can raise new money. The company anticipates paying down the loan by February or March.

"In the first couple of quarters, Capital One has to deal with the high cost of the bridge loan, and they have to build up their infrastructure," said Mark Alpert, an analyst at Alex. Brown & Sons.

Mr. Alpert, who gives the company a "neutral" rating, said that Capital One is still growing but not at the same rate as some of the other credit card specialists.

"Capital One has been declining in [growth of its accounts] in absolute dollars," said Mr. Alpert. "They need to expand their niches. They are good at targeting, but they just need to find new targets."

Other analysts think the current economic climate makes credit cards a problematic bet. "I think it's important for investors to understand that while volumes are surging, the margin is likely to continue to decline," said Leslie Nelkin, a financial services analyst at Furman Selz.

A declining-rate environment and a growing economy benefited credit card companies in 1994, but a slowing economy and a risingrate environment could stymie further growth in the next year.

But Mr. Brown is undaunted. He expects Capital One to expand its business into other kinds of consumer loans late in 1995.

Mr. Brown acknowledged that higher rates could increase attrition of accounts from Capital One, but said the benefit from the teaser rate increases will more than offset the losses, driving earnings for the next two years.

Capital One's spinoff from Signet will be completed early next year, when Signet distributes the remaining 88.5% of the credit card company to its shareholders. Signet investors will have stock in two separate companies.

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