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STOCK WATCH / Robert Hanley

Westcorp Is Looking Good, Analyst Says

August 24, 1986|ROBERT HANLEY

Although Westcorp, the Orange-based savings and loan holding company that went public in May at $11 a share has been drifting higher--its shares crept to a new high bid Friday of $13 a share--at least one analyst thinks the company may be on the verge of a major rally.

"Frankly, I'm looking for it to be a $20 (stock)," said Gerry Haims, of Bateman Eichler, Hill Richards Inc., who believes that once the relatively obscure company gets the attention of institutional investors, its price will skyrocket.

From a fundamental standpoint, Westcorp looks good. Its Western Financial Savings Bank subsidiary--the focal point of the company--has few delinquent borrowers.

Perhaps most important, the company has an unusually strong 17.5% capital-to-assets ratio, which is about three times what regulators currently require and more than five times the industry average.

Recently, Western Financial received approval from the Federal Savings and Loan Insurance Corp. to grow by 39.5% this year. Because the regulatory agency is careful to keep S&Ls from expanding faster than prudent, lenders seeking to expand more than 25% must first obtain permission from the FSLIC.

"This is probably the single cleanest S&L I've seen yet," Haims said. "These guys wash behind their ears."

Formed in 1982 when a San Diego thrift and loan merged with an S&L, Western Financial is different from most other S&Ls in that it handles more auto loans than most. As of Dec. 31, about 61.7% of the lender's loan portfolio was secured by autos.

Despite the higher risk that auto loans entail, Westcorp's consumer loan delinquency rate is about half that of California's commercial banks. That is largely because of a well-oiled collection program, which uses computerized loan records to determine daily which borrowers are in arrears.

"If a payment is a day late, a call is made," Haims said. "And each succeeding day, a call is made until the payment is made."

Westcorp, which reported a 58% increase in net earnings during the six months ended June 30, should rack up a fairly impressive 93% increase for all of 1986, Haims estimates. Net earnings this year are expected to total $1.05 a share, or $15 million, compared to 71 cents a share last year.

Westcorp, which just ended the "quiet period" that followed the offering, will be featured at a conference for institutions to be held next month in San Francisco. With only 5.1 million shares in the public float, "you get a couple of big institutions in there and the stock could go whoosh," Haims said.

Because there is so little stock in the public float, Haims expects that by early next year, Westcorp will take steps to increase the number of shares available to the public. Although company officials say they have no plans yet, Haims said a stock split is a possibility.

But every silver lining has a cloud and there is some downside risk associated with Westcorp, Haims admits.

Additional pressure on auto loan interest rates could narrow the fairly generous spread between what Westcorp pays and what it gets in interest. However, income from its insurance and mortgage banking operations would probably offset any interest shortfall, Haims added.

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