Time to cash in on credit card stocks?
Despite recent downgrades, other reports paint an improving picture of the business.
By Eric McWhinnie
Credit card company stocks have charged significantly higher this year. Plastic-names such as Discover Financial Services (DFS) and American Express (AXP) have easily outperformed the S&P 500 in 2012.
Whether its for convenience on the go, or necessity in a sluggish economy, people continue to rely on credit cards in their daily lives. However, a recent round of downgrades in the industry may give investors the perfect excuse to book profits.
On Monday, UBS Investment Research downgraded Visa (V) and MasterCard (MA), which operate the world's largest card-payments networks. The firm downgraded both to "sell" from "neutral," citing concerns about lower consumer spending.
"We believe both companies' exposure to a slowing consumer spending backdrop makes a slowdown in key metrics simply unavoidable," UBS analyst John Williams explained in a note, according to Reuters. In May, consumer spending remained flat, the first time in six months it did not increase.
UBS lowered its price target on Visa to $113 from $127 per share, and cut MasterCard's price target to $403 a share, down from $457. The bank also reduced Visa's earnings per share estimate for 2012 by 1 cent to $6.02 and MasterCard's by 12 cents to $22.01.
As the chart above shows, it has still been a strong year for charge companies. Shares of Visa and Mastercard have gained 18.86% and 11.97%, respectively. Meanwhile, Discover and American Express shares have surged 43.58% and 23%, respectively. The S&P 500 index has only gained about 6.66% year-to-date.
Although the downgrades weighed on credit card stocks, another report paints an improving picture of the industry. Domestic delinquencies on credit cards declined to their lowest levels in at least two decades, providing a potential catalyst for upbeat earnings.
As long time readers know, a 'Catalyst for a Stock's Movement' is the 'C' in our CHEAT SHEET investing framework. According to Barclays Capital (BCS), data from the six biggest U.S. credit card lenders, including JPMorgan Chase (JPM), Bank of America Corp. (BAC) and Citigroup Inc. (C), the average delinquency rate has decreased to 2.35%, down from above 6% in early 2009. Discover's delinquency rate fell to 1.91% in the most recent quarter, compared to 5.6% in November 2009.
Late Monday, a report by the Federal Reserve also showed that consumers still have an appetite for debt. Consumer credit grew from April by a seasonally adjusted $17.12 billion to $2.573 trillion in May. Revolving credit, which includes credit card spending, jumped by $8 billion, the largest gain since November 2007.
Eric McWhinnie is an editor at Wall St. Cheat Sheet. As of this writing, he did not own a position in any of the aforementioned stocks.
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