Specialty finance company CompuCredit (Nasdaq: CCRT ) markets credit products to the subprime market -- a profitable niche, despite the risks. But those profits may not be enough to conquer Wall Street's low opinion of its sector.
CompuCredit reported fourth-quarter GAAP earnings of $9.7 million, a 223% increase over last year. But it prefers to report what it calls "managed earnings," which assumes that the receivables it securitizes were not sold and remain a part of CompuCredit's business. On that basis, the company had net profit of $19.9 million, compared to $18.1 million in the year-ago period. Securitization is the process of bundling the company's debt into a tradable security, then selling interests in it to investors.
The company had seen higher responses to Internet and TV advertising than it had expected, so it decided to ramp up spending to capture more customers. It plans to keep those marketing expenses high in 2007. Additionally, CompuCredit stopped charging certain fees and expenses to customers, which has diminished revenues throughout the year. The company expects to have a similar drag on first-quarter performance, but it should see the prior-year comparisons equal out in the second quarter and beyond. It will also be increasing its marketing to customers at the low end of the FICO range.
You're probably familiar with the FICO score anytime you've checked up on your credit. Developed by Fair Isaac (NYSE: FIC ) , the FICO credit score is perhaps one of the most important numbers for your personal financial needs.
Those at the lower end of the score have poor credit histories, or have yet to establish enough of a credit history to generate a higher number. College students and immigrants are examples of people who haven't skipped on their credit payment responsibilities, but might still populate the lower end of the range. They're commonly called the "unbanked and underbanked" population.
CompuCredit offers credit cards to people with poor or nonexistent credit histories, charging them higher fees interest rates than many other companies because of the risk they represent. Like payday lenders (which CompuCredit does a little of, too), targeting the subprime market raises the hackles of some critics as preying upon the poor or financially illiterate. Even where firms like CompuCredit help these people restore, repair, or even establish a credit history, they're generally seen as pariahs.
Whether it's credit cards or subprime mortgages, companies targeting the lower end of the market are being hit hard if they miss results. HSBC Holdings (NYSE: HBC ) , the third-largest subprime mortgage lender, warned that impairment charges for mortgages would be 20% higher than analysts had predicted for 2006, while New Century Financial (NYSE: NEW ) said it would report a loss. Another subprime lender filed for bankruptcy.
With tax refund season upon us, expect CompuCredit to report softer earnings. People use their refunds to pay off their debts, which lowers earnings for companies like CompuCredit. But this cloud has a silver lining; because paid-off debt also lowers the number of delinquencies, CompuCredit could see stronger earnings afterwards.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
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