Fool.com: Associates First Capital Turns in Q3 Numbers (News) October 12, 1999

Associates First Capital Turns in Q3 Numbers

By Brian Graney (TMF Panic)
October 12, 1999

Consumer and commercial finance giant Associates First Capital (NYSE: AFS) turned in its third quarter results this morning. Earnings were $0.53 per share, up 16% from a year ago and in line with the First Call mean estimate. Managed net receivables were up 24% to $81.7 billion, while total managed assets climbed 31% to $92.3 billion. However, that kind of growth wasn't enough to placate the stock market gods as the company's share price slipped in early trading.

The Associates, as the company is known, has seen its stock buffeted this year as interest rates have trended up and the company has worked to integrate its acquisition of Avco Financial Services, which was purchased from Textron (NYSE: TXT) for $3.9 billion earlier in the year. Swallowing Avco cemented the company's place as the country's largest independent provider of commercial finance services, with leading positions in home equity loans and credit cards issuance. However, the deal also slowed The Associates' growth rate somewhat.

After growing quarterly earnings per share consistently in the upper teens or low twenties during the past three years, Avco's added heft has served as an anchor on Associates First Capital, dragging its growth rate down into the mid-teens during the first three quarters of this year. That's not too horrible, but it has been enough of a slowdown to scare away some investors. Earnings growth of 15% annually has pretty much been par for the course for the major finance companies lately, although a niche firm such as Metris (NYSE: MXT) operating in the moderate-income consumer lending market has been able to grow nearly four times faster.

Climbing back aboard the fast-growth bandwagon is The Associates' current short-term challenge. By several key performance measures, the company is slowly but surely clawing its way back to where it was prior to the Avco merger. In Q3, return on average equity reached 16.67%, return on managed assets came in at 1.71%, and the company turned in a 44.7% efficiency ratio -- all of which were up from Q2, but were still short of what was seen last year pre-Avco. The company has maintained its reputation for high asset quality, and net charge-offs have settled back into their historical 2.25% to 2.75% rate range.

The addition of Avco hasn't been all bad and has the potential to pay off in the end. The deal gave The Associates quick entry into new international markets and the opportunity to step on the cost-cutting pedal. As a result, operating expenses declined for the second quarter in a row.

The key for jump-starting the growth at The Associates will be coming up with a steady stream of innovative products, such as its new Freedom Loan, which lowers interest rates for consumer borrowers who make consecutive, on-time payments. The company is also aiming to exploit the Internet as a new delivery channel for its massive home equity loan business, building off its 18-month deal with America Online (NYSE: AOL) from earlier this year to be the premier home equity lender on AOL's Personal Finance channel.

The Associates' story is well understood, so investors shouldn't expect a rapid appreciation of the firm's share price comparable to what has happened to Capital One Financial (NYSE: COF) over the past two years. However, the company is a steady grower that carries out its large business in a consistent and conservative manner -- two qualities that investors should keep in mind if the company's share price continues to slide.

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