Providian Financial (PVN) shares plunged Oct. 12 after the company said it sees much lower than expected third-quarter earnings per share of $0.19-$0.21. DB Alex. Brown downgraded its investment rating on the credit-card issuer to market perform from strong buy, and also downgraded shares of Providian competitor Capital One Financial (COF) to market perform from buy.
Analyst Mark Alpert says the problem this time appears to be in the subprime (borrowers with higher credit risk), rather than the prime, segment of the credit-card industry. He cut his $3.20 2001 EPS estimate for Providian to $2.40 and his $3.30 forecast for 2002 to $1.80. Alpert says he would like to view the downgrade as "clearing the decks," but he has lost confidence in Providian management and the company's business model. He notes that Capital One is clearly a stronger company, with a better model than Providian; however, the analyst says prime issuer MBNA Corp. (KRB) reported virtually no growth in its U.S. card business in the third quarter. Alpert believes Capital One could face slowing growth in its prime and subprime operations, and rising losses in the subprime business over the next few quarters.