Pick Of The Pack

Standard & Poor's McMillan has a way of pulling the best from a mixed bag of financial services companies

Standard & Poor’s analyst Robert McMillan preaches that a slow economic stretch for an industry does not ruin every company within it. Although the two industries on his watch — brokerage companies and consumer credit firms — are taking divergent paths, McMillan has found investments among the 30 companies he tracks in both industries that are worthy of attention.

“Brokerages are driven by the stock market,” says McMillan, who has a decade of experience in the financial industry and joined S&P in 2000. Many of the brokerages he follows, which include Merrill Lynch and Lehman Brothers, have enjoyed a strong run, thanks to a stock market rally early in 2003. The catch, McMillan says, is that many of the companies in the industry have quite possibly run up their valuations so that they exceed their worth in a slow-growth economy. In turn, this group of stocks might just move in tandem with the market for the rest of the year and possibly through 2004.

McMillan, a Yale grad who received his M.B.A. from New York’s Columbia University, feels that “the keys to consumer credit companies are often interest rates, credit quality, and, to a lesser degree, the economy.” He is more optimistic about the near-term fortunes of consumer credit companies because interest rates are low, so lenders and credit card issuers can borrow cheaply and still reap profits from the higher rates they charge borrowers and spenders. With consumer credit companies swallowing fewer write-off loans, their overall profit should be greater.

McMillan places his highest rating — five stars — on three companies: Lehman Brothers Holdings, Capital One Financial, and MBNA Corp. Brokerage firm Lehman Brothers Holdings (NYSE: LEH) has profited from its position in the bond market and from the interest of big institutional investors in fixed-income investments while the stock market remained weak. If stocks keep rallying, McMillan says, Lehman will continue to cash in now that the firm has expanded its presence in equity-related business and corporate finance. Additionally, Lehman’s plans to acquire asset management firm Neuberger & Berman should be a boon in a rising stock market.

Capital One Financial (NYSE: COF) has taken steps to improve its credit quality. Capital One is targeting customers with better credit as a way to stem delinquencies and defaults. Cost-cutting efforts should also help profit growth rise to $4.63 a share in 2003 and $5.49 next year. McMillan’s last five-star pick is MBNA Corp. (NYSE: KRB), another credit card company. Like Capital One, MBNA is taking steps to raise the overall credit profile of its borrowers. And low interest rates are allowing MBNA to keep its margins wide since it can tap credit at a low level to lend to consumers at higher rates.

Merrill Lynch & Co. (NYSE: MER) earns a four-star rating from McMillan. He says the firm has kept costs down and could do well on a wave of increasing investor confidence in the stock market. Legg Mason (NYSE: LM), another four-star stock, has done a good job expanding its asset management business. An

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