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By Amey Stone A credit-card company might seem like a risky investment these days for plenty of reasons. Consumer debt continues to mount, while interest rates are likely to start climbing in the not-too-distant future, which could make it harder for people to pay their bills. New credit cards are proving a tougher sell as the U.S. market reaches saturation. The response rate to mail offers has dropped from 2.8% in 1992 to 0.5% in the third quarter of 2003 (a period in which annual mail volume increased five-fold), according to data from research firm Synovate. Lately, credit-card issuers have been forced to come up with ever more creative rebates and reward programs to gain new customers.
So why is credit-card pure play MBNA (KRB
) growing so fast? It now has about 50 million customers, 10.7 million of whom were gained in 2003 alone. In 2003, net income rose 32%, to $2.34 billion, or $1.79 a share, up from $1.34 in 2002, earning MBNA the No. 19 spot on BusinessWeek's 2004 list of the top best-performing companies.
LOWER RISKS. MBNA's core strategy for staying ahead of the pack in the hotly competitive credit-card business is to market its cards through "affinity" groups. Received a solicitation for a credit card from your college, favorite charity, or local sports team? Chances are MBNA is providing the plastic. In 2003 alone, it inked new deals with nearly 400 organizations ranging from Merrill Lynch (MER
) to Spain's Banco Cooperativo and National Geographic in Britain. It renewed more than 1,400 other deals with groups like the National Football League, the American College of Surgeons, and the University of Michigan.
"We expect to continue adding groups at about that pace and expect to continue penetration into existing groups," says MBNA spokesman Jim Donahue. "There is a lot of topside with our existing relationships that we believe we can continue to make headway with." Not only do the affinity deals help MBNA market cards but they have helped it generate a loyal customer base with high incomes and strong credit histories. MBNA says its typical customer has a household income of $71,000, owns a home, and has an 18-year history of paying bills on time.
As a result of its high-quality customer base, MBNA boasts lower charge-off rates than the industry average, says Jim Callahan, a stock analyst at research firm Morningstar. MBNA didn't make the mistake of pursuing customers with bad credit records, which created problems for some credit-card companies, such as Providian Financial (PVN
), when the economy stumbled, points out Scott Valentin, an analyst at Friedman, Billings, Ramsey & Co.
BRANCHING OUT. As the economy improved in the past two years, MBNA customers began charging more while doing a better job of paying their bills on time. MBNA's loan receivables (mostly made up of the balances on customer accounts) were $33.6 billion at the end of 2003, an increase of $4.9 billion from the prior year. Over the same time period, the percentage of loans 30 days past due fell from 4.36% to 3.84%.
Other credit-card issuers are getting smart to MBNA's strategy, and competition is intensifying for the high-earning customers. "Now everyone is going after the same target," says Gwenn Bezard, senior analyst with financial research firm Celent Communications.
In response to slowing industry growth in the U.S., MBNA is building its international business as well as branching into new, potentially higher-growth lines of business. In January, it announced it's acquiring a British company that lends money to businesses and consumers to pay insurance premiums. In February, MBNA signed a deal to buy Sky Financial Solutions, which provides loans for dental practices. It has new consumer-finance products, such as home-equity loans.
MERGER MANIA? So far, Wall Street seems confident in MBNA's future growth. Analysts' median price target for the stock is $32, a 20% jump over its current $26, according to First Call. Analysts' consensus is for earnings to increase to $2.07 a share in 2004, up nearly 10% from 2003.
Friedman's Valentin, who gives the stock his highest rating, thinks earnings can grow at a 15% rate in 2004, giving the stock a price-earnings ratio of 13, vs. 18 for the benchmark Standard & Poor's 500-stock index. "It's relatively cheap," he says. "Its p-e is much lower than the market despite it having a better growth profile."
After a 75% run-up this past year, however, some analysts think MBNA is getting pricey. Callahan's target is just $25, and he rates it a hold. Tom Taulli, a principal at investment firm Bridgewater Capital, thinks the stock has risen partly on investor expectations that MBNA may be acquired. "It's just a matter of time," he says, since so many megabanks want to expand their credit-card operations and it's considered one of the few remaining niche players. "They are shark bait."
GOING IT ALONE. Analysts agree that merger speculation surrounds the stock. A deal announced Jan. 29 for MBNA to issue American Express-branded (AXP
) cards was perceived by some investors as a "baby step" toward a merger between the two companies, says Callahan. MBNA, however, says it plans to stay single. "We're proud of our record as an independent company, and we intend to continue in that way," says Donahue.
The industry will get more competitive, but MBNA has proven its ability to weather intense competition for years, as Donahue is quick to point out. For investors in this well-run company, the biggest risk is macroeconomic. MBNA's future growth is tied to the overall economy and the health of the global consumer. As long as the economy provides the wind, MBNA should continue to sail. Stone is senior writer for BusinessWeek Online in New York EDITED BY Beth Belton