Mr. Carcache: I focus on consumer finance stocks, including the major credit card issuers, American Express (AXP), Capital One (COF) and Discover (DFS). I also cover the accounts receivable management space. That includes buyers of charged-off debt, including portfolio recovery associates and asset acceptance. They essentially are buyers of charged-off debt from credit card issuers. And I also cover H&R Block (HRB).
TWST: What are some hot issues on the credit card side?
Mr. Carcache: Over the last couple of months, investors have been focused on so
many different issues that were of such significant concern that valuations were
being driven largely off of book value. Some of those concerns included the
potential impact of consolidating off balance sheet credit card loans, and the
potential capital hit that companies might be forced to take as a result of
that.
There were also concerns about legislative and regulatory changes to credit card
rules, which would adversely impact the card issuers. Clearly with unemployment
rising, there has been concern about charge-offs continuing to increase and
putting additional pressure on earnings and of course the need for additional
reserve building. The potential for dilutive capital raises was another concern.
Putting all these things together created a bit of a doomsday scenario that was
being reflected in share prices.
Then we got to the stress test. Results from the stress test, I think, took the
capital issue off the table. Broadly speaking, I think investors felt more
comfortable with capital adequacy.
Following that, we got greater clarity on the legislation. Ultimately a bill was
passed, but at least the uncertainty associated with exactly what was going to
change and what was going to happen was removed. There is change coming, but
there is greater certainty around it now. Also, I think people feel like they
have a better handle now on the potential accounting implications of bringing
off balance sheet credit card loans back onto the balance sheet and the
potential capital impact.
Now I think investors feel more comfortable looking forward. Given that this
doomsday scenario has been taken off the table, valuations have now reverted to
somewhat normalized earnings. Broadly speaking, the market is looking for the
names that I cover to be at a stage toward 2011, 2012 where things will be
somewhat normalized and then deriving valuation based on earnings in those
years, and then discounting back to the present to arrive at a valuation for the
shares.
Tickers included in this excerpt: AXP, COF, DFS, HRB, PRAA
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