The analysts at Citigroup have put out an upbeat report on credit card companies as a group, expressing expectations this sector of the financial sector will out perform in 2012. Citigroup's reasons for the positive outlook on these companies cover three aspects:
- The primary revenue source for the credit card companies – merchant fees – has not been affected by government regulations. Fears were that consumer protection laws would put limits on how much credit card companies could charge retailers for credit card transactions.
- Credit card use is expected to grow as consumer confidence and spending increase throughout 2012. The U.S. economy is starting to give more indications of a slightly more robust level of growth.
- Alternate payment systems are not ready to make a significant dent in the credit card stranglehold on payments processing.
Here is a look at the major players in the credit card sector, from largest market capitalization to smallest:
Visa (V): With a current market cap of $81 billion, Visa is the largest of the credit card processing companies. At $100 per share, the stock has a P/E of 20 based on FY 2011 earnings and a forward P/E of 17 based on a 2012 consensus earnings estimate of $5.86 per share. Earnings growth is forecast to be 17 percent in 2012 and 16 percent in 2012.
DJIA component American Express (AXP) checks in second on the size meter with a market cap of $56 billion. American Express is trading at just under 12 times the expected 2011 net earnings – once the fourth quarter results are released on January 19. Net income is forecast to grow by just 2 percent to $4.17 per share in 2012.
MasterCard (MA) has a market cap of $44 billion and is trading at 18.5 times consensus 2011 earnings. The fourth quarter earnings release is scheduled for February 2. The Wall Street consensus earnings estimate for 2012 has MasterCard's net income growing by 16.4 percent. At $346 per share MA has a forward P/E of 16 – right in line with the projected growth estimates.
Capital One Financial (COF) was called out, along with Visa and MasterCard, by the positive Citigroup report. This $21 billion market cap company earns its money on credit card and other consumer loan spreads rather than from transaction fees. Capital One has a P/E ratio of 6.1 based on consensus 2011 earnings – Q4 earnings out on February 19. The Wall Street consensus for 2012 has Capital One's net income declining by 20 percent. This stock may have the most to gain from stronger credit card results.
Discover Financial Services (DFS), at $13 billion market capitalization, splits its business between credit cards and banking services. Like Capital One, Discover earns the bulk of its revenues from interest income. DFS also trades at a current P/E of 6 and the Wall Street consensus estimate has 2012 earnings falling by 18 percent compared to 2011.
From the numbers given here, Visa and MasterCard are set to continue existing strong growth trends into 2012 and the share valuations and P/E ratios reflect those forecasts. Capital One and Discover are struggling with loan charge-offs due to consumers stuck in a tough economy, and need economic conditions to improve for profits to follow suit. American Express is valued for slow growth and needs some form of catalyst to spark earnings growth.
The earnings forecasts used here are the consensus earnings estimates – an average of the different analyst estimates. All of the stocks have individual analysts forecasting significantly higher results in 2012, especially MasterCard and Capital One Financial. Investor should watch for more signs like the Citigroup report with increased estimates as the year moves along.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.