Mercury Finance Not to Blame for Other Auto Lenders' Dips

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While the car wreck at

Mercury Finance

(MFN:NYSE) may be causing investors to focus on weakness in other automobile financing companies, it's

not

causing the crash in their stock price.

The stocks of most companies in the sector were slammed Thursday.

Jayhawk Acceptance

(JACC:Nasdaq) plunged 4 5/8 to 3 5/8.

First Merchants Acceptance

(FMAC:Nasdaq) dropped 7/8 to 14 7/8.

WFS Financial

(WFSI:Nasdaq) fell 3 3/4 to 14 3/4.

Union Acceptance

(UACA:Nasdaq) dropped 1 to 19 7/8. Mercury's stock hasn't traded since Tuesday.

At first blush, it looked like the companies were simply falling in sympathy with Mercury, which disclosed Wednesday that it had overstated its earnings since 1993 because of false accounting entries. Mercury said it fired its controller, James A. Doyle, whom it also said had disappeared, but Doyle's attorney reportedly said Doyle is cooperating with federal authorities investigating Mercury.

But there's more to the stock slide, analysts say. "It's wrong to say it is spillover from Mercury," says John A. Heffern, an analyst with

NatWest Securities

. "It's spillover from bad lending."

Indeed, several of these companies are experiencing higher delinquencies and loan losses similar to those in the credit card industry. After all, consumer bankruptcy filings are rising as people pile on more and more debt.

On Thursday, Jayhawk disclosed that it posted a loss of $7.9 million, or 33 cents a share, in the fourth quarter, which shocked investors. Jayhawk's unexpected loss resulted from a $15.5 million special charge to boost the company's allowance for credit losses. In the year-earlier period, Jayhawk earned $1.8 million, or 9 cents a share.

And rumors are flying that First Merchants will report poor fourth-quarter earnings because of increasing credit problems, analysts say. First Merchants didn't return a phone call seeking comment. Analysts expect it to report that it earned 50 cents a share, according to

First Call

. Its credit problems worsened in the third quarter, when accounts 31 days past due rose to 3.4% from 2.5% at Dec. 31, 1995.

To be sure, all companies in the industry are not exactly alike. Jayhawk, for example, targets consumers with D-level credit, says Michael K. Diana, an analyst with

Bear Stearns

.

But until now investors largely ignored potential problems. Mercury and Jayhawk, however, show that in the world of auto lending investors should dig deep before buying. "What Mercury has done is reduce investors' tolerance of mistakes by other companies," says Heffern at NatWest.

Diana points to two companies he considers quality auto financing concerns,

AmeriCredit

(ACF:NYSE) and Union Acceptance. Both have strong technology and stringent lending standards. "AmeriCredit is better able to price credit according to risk and to track credit decisions," says Diana. AmeriCredit fell 3/4 on Wednesday and 7/8 more on Thursday to close at 19 3/8.

In the second quarter ended Dec. 31, AmeriCredit's provision for loan losses, for instance, fell to $1.6 million from $2.1 million a year earlier. And in its second quarter ended Dec. 31, Union Acceptance said credit losses in its non-prime portfolio actually fell to 3.49% from 3.54% at Sept. 30 on an annualized basis. And both companies beat analysts' estimates in the most recent quarter.

Meanwhile, WFS Financial missed the consensus analysts' estimate of 42 cents in the fourth quarter by 5 cents when it reported earnings Wednesday after the close. It earned $9.4 million, or 37 cents a share, flat with the year-earlier period.

Diana says WFS has large loan-loss reserves. But in its earnings release, WFS noted that its growth is outstripping its resources.

"We have seen higher-than-expected levels of personal bankruptcies," the company said. "We have been adding to our collections staff and working to implement a computerized credit scoring system to aid our underwriters in making contract decisions. The pace of those programs, however, has not yet caught up with our national expansion activities, but we anticipate realizing the full benefit of these efforts during the second half of 1997."

Olympic Financial

(OLM:NYSE), which fell 2 on Wednesday to 14 7/8, did hit the target analysts set when it released its fourth-quarter earnings Monday. It earned $17.4 million, or 45 cents a fully diluted share, compared with $10.2 million, or 34 cents, in the year-earlier quarter.

But Olympic also has seen deterioration in its portfolio. At Dec. 31, loans delinquent more than 30 days rose to 2.64%, up from 2.19% in the third quarter and 1.33% a year earlier. Net loan losses in the fourth quarter reached 1.27% on an annualized basis, up from 0.95% in the third quarter and 0.73% a year ago. And Olympic had to add another $13.7 million to its reserves for bad loans, pushing that number up to $95 million. The company projects that it will have to continue adding to its reserves this year.

"Olympic recognizes the importance of adequately reserving for potential loan losses," Warren Kantor, Olympic's chairman, said in a statement with the earnings release. "The company will continue to increase its loan loss reserve levels as it has in the past; Olympic maintains such reserve levels in excess of actual historical loan loss results. Also, the company anticipates building additional reserves throughout 1997."

Diana says: "I believe Olympic has adequate reserves, but there are some others who don't."

By Erle Norton

enorton@thestreet.com