Missteps in new businesses may have hurt Beneficial Corp.'s reputation in the past. But Natwest Securities analyst John Heffern, saying he believes the consumer lender is poised to bounce back, and has initiated coverage with an "accumulate" rating.
The mistakes of the past two years have tarnished the 67-year-old Wilmington, Del.-based company, which has catered to less-creditworthy borrowers through a nationwide franchise of more than 1,100 branches.
The company's domestic business has shown consistent performance in recent years, but blunders in new business ventures resulted in significant writeoffs the past two years, according to Mr. Heffern. Slips in campsite loans in Germany and income tax refund anticipation loans caused earnings to fall steadily - from $3.45 a share in 1993 to $3.28 a share in 1994 and $2.72 a share in 1995.
But Mr. Heffern said he thinks Beneficial's problems are behind it. "The story is that 1994 and 1995 were sloppy years. The change is that the decks are clear now and it really looks like the company has gained forward momentum."
For one thing, he said, adjustments made to the refund anticipation loan program are already proving successful. Improved collections and rising demand for this product have led management to predict stronger results for the program this year.
Management's comments on this program also led Mr. Heffern to raise his earnings estimate for 1996 to $5.35 a share, from $5.30. But he said his views were tempered by an announcement that the company was launching a private label credit card program with K mart. This program probably will create higher operating expenses, he said in his report.
But the company's experiences in Germany and in income tax refund loans have made investors timid about new business ventures.
"To their discredit, every time they have gone looking for greener grass, they've had their heads handed to them," Mr. Heffern said.
Even if management missteps again, Mr. Heffern said, investors probably will gain on the stock. For one thing, he pointed out, Beneficial is priced at 10-times projected 1996 earnings, nearly 17% below pricing multiples for other specialty finance companies. On top of that, its nationwide franchise is attractive for a large financial services company looking for a foothold into this segment of the market.
"If Wells could buy First Interstate in an unfriendly deal, then it is reasonable that Beneficial would be at least as susceptible to such an unfriendly offer," he said.
"The capacity is there to allow for stock buybacks," he added. "Or, there is an unrecognized, significant franchise that could be exploited by another large financial services company."
Mr. Heffern added that while he is betting on management's ability to make investors forget about the problems of the past, he is "sleeping well" because of the buyout potential of the stock.
The coverage of Beneficial by the Natwest Securities analyst begins just as another consumer lender, Eagle Finance Corp., has come under fire from a McDonald & Company Securities analyst for its accounting policies.
The stock of the Gurnee, Ill.-based purchaser and servicer of installment loans sank 12.5% Monday to a 52-week low of $8.50 a share before rebounding Tuesday to close 11.4% higher, at $9.75.
The shares came under fire after the analyst, Michael Durante, said 1996 earnings would suffer because Eagle Finance's management did not fully recognize its loan losses in 1995. The company reported an 8-cent-a-share loss for the fourth quarter because of a $2.2 million credit loss provision.
"We believe they have materially understated their reserves and overstated their earnings for 1995," Mr. Durante said. "They are abusing the lack of industry standards or benchmarks for credit quality accounting."
The company ought to record an additional $17 million in losses for 1995, he said, instead of delaying the writeoff and hurting the stock in the future.
But company management countered on Tuesday, saying its delinquency rate was currently 7.5%, compared with 8.2% at yearend and 9.7% at Dec. 31, 1994.
"Our loan portfolio is an improving-quality asset," Eagle chief financial officer Robert Braasch said in a prepared statement.