Shares of Associates First Capital Corp. plummeted nearly 13% Friday after the second-largest specialty finance company released a lackluster fourth-quarter earnings report and warned analysts that it would fall well short of its first-quarter earnings expectations.
Associates, based in Irving, Tex., matched the analyst consensus of 56 cents a share for the quarter. But the company, which has boasted a loan growth rate of 20% per year, produced only a 12% rate for the fourth quarter and 18% for 1999. Also, credit quality deteriorated. Chargeoffs rose to 2.97% in the fourth quarter from 2.73% in the third.
Analyst E. Reilly Tierney of Fox-Pitt, Kelton Inc., New York, said the company was able to meet consensus only because it began using gain-on-sale accounting, a highly controversial technique that allows companies to book all the future income on a loan in the current quarter.
"This goes counter to the trend," Mr. Tierney said, noting that most finance companies have moved away from gain-on-sale. "This is one of the things that have spooked the market."
Trading of the company's shares was halted Friday morning, as market makers were scrambling to match sell orders with buyers. The stock closed off $2.875 at $19.50, while the American Banker index of the 50 largest banks fell 3.24% amid a broad selloff in stocks sparked by news that inflation was worse in the fourth quarter than economists expected. (See story on page 18).
Several Wall Street brokerages, including Stephens Inc., A. G. Edwards Inc., and Banc of America Securities reduced earnings estimates and ratings on the company.
"This is a very big deal," Mr. Tierney said. "Associates First was a high-flyer for so long. It had a tremendous track record."
Its net income rose to $408.7 million in the fourth quarter from $332 million, or 47 cents a share, in the same quarter of 1998. Its net interest margin rose to 9.26% in the fourth quarter from 9.13% in the third, and its efficiency ratio improved to 43.7% from 44.7%.
The company also took a $110 million charge in the fourth quarter to exit the unprofitable and shrinking manufactured-housing sector.
An Associates First representative said in a conference call Thursday that it would miss its first-quarter earnings target by nine cents because of investments it made in technology and the Internet.
But Mr. Tierney said the shortfall and fourth-quarter charge were not the only things bothering analysts. "The problem that the market has is its slowing growth rate and the quality of its earnings."
However, Katrina Blecher, analyst at Brown Brothers Harriman, said in her report that the market's response to the earnings announcement was an "overreaction."
The outlook for the company seems promising, said Ms. Blecher, who lowered her earnings estimates on Associates but raised her recommendation to "short-term buy."
"The company stressed that it has not pulled back from its acquisition strategy, a strategy that would result in higher receivable growth," she said. The margin is expected to improve, and the company has also improved its underwriting standards, she went on, adding that she thought the decline in the stock was largely the result of the company's lack of guidance for the current year.
"Management's outlook for 2000 represents a result one cent below consensus," Ms. Blecher said. "We do not view this as particularly meaningful. Now that guidance has finally been provided, we believe the cloud hanging over the stock has lifted."
