All Is Fair In Love, War and Credit - My Readers Find Skeletons In The Closet Of Fair Isaac (FICO)?
Last weel I posted a mail from a reader's rant on FICO (see Fair Isaac May Get Treated Unfairly When…), along with our own take on the on the situation (subscribers see FICO Note). Well, said BoomBustBlogger is back with some more "unfair" treatment of Fair Isaac!
Did you know it was Fannie who advised other banks to use FICO (back in 1995 I think)? That did not work too well.
think that the FICO score is actually hollow somewhat, given that in
2006 the Median FICO score was 723 and deteriorating much since 2000 and
not signaling an impeding crisis.
According to a Fitch
study, the accuracy of FICO in predicting delinquency has diminished in
recent years. In 2001 there was an average 31-point difference in the
FICO score between borrowers who had defaulted and those who paid on
time. By 2006 the difference was only 10 points. The bigger picture is
that a massive collapse of lending can occur while all the lenders have
used FICO, so what is the value proposition of using the scoring? I am
known to ask annoying stupid question in my firm…
think that FICO wasted cash on the stock buy back, it borrows at 6.1%
and bought the stock at around 6 Free Cash Flow yield. Granted the cost
of debt is pre-tax, but the arbitrage is poor, I think clearly it was a
pump-so-the-management-can-dump scheme. This is the consumer picture in
context, FICO was riding the consumer leverage bubble.
is the revenue picture skewed since 2002 because of housing bubble. You
can clearly see the take-off in revenues due to the housing bubble
starting in 2002.
recent beat of earnings is due the last calendar quarter of 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).
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.
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
you read creditcards.com August 1st weekly report, here what they say:
(Would you send me your screen on consumer discretionary as a barter of
idea?, even the abbreviate version without analysis that would be a
fair trade of idea.)
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 recovery.
Hope to exchange some more interesting ideas,