Fair Isaac May Get Treated Unfairly When The Newest Credit Bubble Bursts

Reggie Middleton's picture

In continuing my rant on the state of the US consumer, I present to you this email I received from a reader...

Short FICO. This company engineered a stock-back program in Nov 2011. The Stock buy-back was equivalent to 20% of its market cap at the time. The three executives left the company and cash in their stock options. The company had 3 CEOs in 4 years. The Company latest quarter was slightly down, without the massive buy-back the share count would have meant that the stock had lower earnings per share YoY. What is staggering is while the company did this massive stock buy-back, some execs (including the 3 execs departing) sold at price sometimes below the price the company was buying back its stock at. If the company was doing such a good deal by buying the stock "cheap" at around 40 USD, why would the execs sell their "cheap" stock at 39 USD?

Now recently the company announced its quarterly earnings, poor data, the stock plunges by 10.5%, next thing you know SECput the Rule 201 alternative uptick rule. The next day the stock is up 10.5%, but of course nothing is done to prevent the stock to move up more than 10% a day. The same happened on the same day with Vulcan Materials which released its earnings, really crappy (a lot more than FICO), Vulcan Materials is a Einhorn short, and yet again you have the rule 201 implemented the next day....

Those who have been following me recently know that I have been laying the foundation for a most cogent argument against the US consumer, hence the consumer discretionary and durables sector - as articulated in BS At The BLS Leads To Profitable Short … and Is The New US Consumer Consumption Bubbl…

FICO is a credit data processor and provider. They make money when a lot of people apply for loans, and make less money when less people apply for loans. With that being said...

Credit card usage is dropping...

Mortgage applications are dropping... The two largest uses of consumer credit is falling to the wayside (save the student loans mentioned in the links above). More on FICO...


FICO Note Page 1.1FICO Note Page 1.1

FICO Note Page 2FICO Note Page 2

We have formed an internal opinion on FICO that all paying subscribers are invited to download here: File Icon FICO Note.

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JenniferS's picture

the whole problem with this country is that nothing is done the smae accross the board. there should not be 3 credit reporting agencies, there should only be one, and these ppl should be accountable for the information the publish, perhaps then things would be much better for the avg person who does not have much money or credit, yet pays on time, all the time. it’s all about money, the more you have the more credit you will be given, the higher your score. big flippin deal about the score. it is nothing but someones so called formula to determine your worthiness, they dont know you. infact, if they give you a lower score, and then you get denied credit, guess what, your score just got lowered again, every time you apply for cash loans, your score gets lowered. I will stick with my emergency credit card all else cash.

WhiteNight123129's picture

The recent beat of earnings is due the last quarter 2011 (when the stock buy-back was announced), 7 million of operating profit were due to slashing R&D, so earnings are up but if you slash R&D how do you grow? That should shield a compression of multiple not an expansion of those. Further the tools is more lumpy and not recurring, while the score business (recurring is flat).

So the latest quarter was actually showing EBIT down slightly in nominal dollars (down adjusted to inflation) YoY and EBIT margin down too YoY for same quarter, so the slashing of R&D did not result in higher margins YoY on the quarter. So you have probably 150 EBIT normalized excluding the one time R&D slashing. But the tools sales will bring volatility on teh downside in the downturn, those have been the reason for growing sales a bit, yet lower earnings, in the downturn those lumpy components should shrink. While the last 30 years was consumer leverage. Unlike 1929 where the leverage was on corporation this levered cycled falls squarely on the consumer and the Gov. The company trades at 13 Times EV/ Normalized EBIT which given the headwinds of necessary deleveraging, you might not want to pay more than 6-7 times, and the insiders know it and have sold into the share buyback giving 0 credibility to this buyback.


The sales exploded in 2002 as the housing bubble was pumped, if you chart the quarterly revenues for 20 years this is obvious.

Now this is what the leverage of consumer looks like in historical context.


Now if you do not listen to the Fed which says that credit card conditions are easing (Fed is full of hot air http://www.bloomberg.com/news/2012-08-06/fed-says-banks-ease-standards-o...) and check from creditcards.com here is what they have to say. First the rate has been increasing in the last 2 years, so there is no easier credit for consumers. But then credit card companies are retrenching their offers.

If you read creditcards.com August 1st weekly report, here what they say:


Issuers also cut back on credit card mailings
The lack of movement comes at a time when issuers have also been pulling back on mailing
new credit card offers to consumers.
Prior to the recession, issuers flooded consumers' mailboxes with card offers and
aggressively sought out new customers with a wide variety of credit scores. However, in
2009, issuers slashed the number of card offers they mailed by nearly two-thirds and
primarily concentrated the offers they did send on consumers with excellent credit, say
industry analysts. Since then, credit card mailings have yet to bounce back to pre-recession
levels, according to data from the market research firm Mintel Comperemedia.
Issuers did ramp up the number of card offers they sent in 2010 and 2011 and even began
to send more offers to consumers with lower credit scores. However, issuers have since cut
back significantly, say analysts at the international financial services firm Credit Suisse.
Citing research from Mintel Comperemedia, Credit Suisse analysts say that the number of
credit card offers that consumers received in June is down by 43 percent, compared to the
same time last year. June also marks the fourth month since January that the number of
credit card mailings sent to consumers has declined.
The lower level of credit card mailings in 2012 contrasts significantly with 2011. Then,
issuers sought out new customers aggressively, mailing out a total of 4.8 billion credit card
offers throughout the year. By contrast, issuers have sent out just 1.5 billion offers in 2012,
and analysts at Credit Suisse estimate that the total number of offers sent out by the end of
the year will total just 3.5 billion.
If analysts' estimates hold out, then the number of credit card offers mailed in 2012 will be
just slightly more than the number of credit card offers that were mailed in 2010. During that
time, issuers were still just shaking off the effects of the recession and contending with new
financial regulation, including the Credit CARD Act of 2009. Now, issuers are contending with
a series of banking scandals, a financial crisis in Europe and a painfully slow U.S. economic



Zero Govt's picture

Credit Card usage is dropping ...bad news for Credit Card companies (the global duopoly of Visa and Mastercard) 

we're all moving to Debit Cards ...oh looky damn diggiddy if those global duopolies have not shifted onto my banks Debit Cards too

Rothchild and Rockerfeller keep the consumer skimming operations alive, politicians say not a squeek

Jolly.Roger's picture

Is it true that Reggie and Sov. Man et al PAY to have their articles published on ZH?

f16hoser's picture

And the (supposed) CO shooters Dad WAS a whistle-blower on the FICO mess. Things that make you go Hmnnnn.....

DeadFred's picture

Forget all this analysis of trends and fundamentals. If you want to see if you should short them check how much money they gave to BO, MR and assorted congress critters. How old school!

No Euros please we're British's picture

Such a shame I'm not a paying subscriber, but I don't like the sound of having an ani internal anyway.

Winston Churchill's picture

So FICO gets a solid 400 on their own scale.