Shares of Advanta Corp. have soared 44% since mid-January on expectations that the credit card company will report stellar earnings for the first quarter.
All credit card companies' shares have risen rapidly this year - in the neighborhood of 25% - but Advanta's rise has easily outpaced the group.
Roughly $2.2 billion, or 22% of Advanta's loans outstanding, are on so- called "teaser" rate credit cards that were due to reprice to a higher rate this quarter, said Mark Alpert, an analyst with Alex. Brown & Sons. First quarter earnings will reflect an increase in the yield on the loans of about 7 percentage points.
Advanta has an additional $800 million of teaser rate loans expected to reprice in the second quarter, Mr. Alpert said. In all, Advanta's teaser rates represent between 35% and 40% of all its loans, the highest ratio in the industry, he said.
First USA Inc. has teaser rates on only 25% of all loans, MBNA Corp. has them on 15%, and Capital One Financial Corp. is phasing out teaser rates, Mr. Alpert said.
As a result, "the first quarter should be very strong for Advanta," said Gary Gordon, an analyst at PaineWebber Inc.
While some consumers may drop Advanta when their rates rise, many will likely stay, he said.
Still, Mr. Gordon said he was surprised by the extent of Advanta's price gain. Bullish economic news released in February may have also boosted the Horsham, Pa.-based company's shares, he added.
Some observers have said the company's joint venture with Royal Bank of Scotland to distribute credit cards in the United Kingdom may already be paying dividends, further aiding the stock.
Mr. Alpert said the success of First USA's spinoff of its Paymentech subsidiary may also be boosting Advanta, which also has leasing and second mortgage companies.
"First USA's very successful spinoff may indicate that credit card companies that have other businesses that are (insufficiently) valued will rise in price," he said.
THe consensus view among analysts is that Advanta will report earnings of 90 cents per share for the first quarter, a 21% improvement over last year's first quarter, according to First Call Corp.
Despite the good prospects for the quarter, Mr. Gordon is pessimistic about the outlook for credit card companies. Tougher competition and shrinking margins could squeeze profits, he said. At the same time, demand for credit cards could slow, he predicted.
That view has yet to affect the credit card stocks. Capital One is up 23% since mid-January, MBNA 27%, and First USA 23%. The S&P 500 is up 7% in that time, and the S&P bank index is up 13%.
Bank stocks and the overall market were flat on Thursday - the S&P bank index inched up 0.03% and the S&P 500 was unchanged.