Time to cash in on credit card stocks?

Despite recent downgrades, other reports paint an improving picture of the business.

By Wall St. Cheat Sheet Jul 11, 2012 4:12PM

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.

 

More from Wall Street Cheat Sheet

1Comment
Jul 12, 2012 8:30AM
avatar
I have been selling my winners for the last few months. I figure that's why the market correction of more than 10% has yet to materialize.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
284
284 rated 2
461
461 rated 3
671
671 rated 4
628
628 rated 5
618
618 rated 6
615
615 rated 7
495
495 rated 8
347
347 rated 9
115
115 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
DYNDYNEGY Inc10
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.