Bank on Consumer Debt - Buy a Credit Card Company

Includes: AXP, MA, V
by: David Zanoni

With credit standards being strictly tightened by banks, consumers are increasingly turning to credit cards as loan replacements. There are currently 609.8 million credit cards held by consumers. The average household credit card debt is $15,799. The total U.S. revolving debt is $793.1 billion as of May 2011 (98% of which is credit card debt). The average APR on these credit cards is 14.89%. Wouldn’t it be nice to enjoy consistent 14% returns? Don’t you wish you owned a credit card company? Why not buy stock in one of the major credit card companies: American Express (NYSE:AXP), MasterCard (NYSE:MA), or Visa (NYSE:V)?

American Express, owned by Warren Buffett among others, is a high-quality name in the credit card industry. It has pulled back nicely from its 52-week high of $53 a share down to $44. It is trading at a nice value with a forward P/E of 10.82 and a PEG of 1.08. AXP is expected to grow earnings at 10.5% for the next five years, pays a dividend of 1.6%. I would expect American Express’ total return (stock rise plus dividends) to be around 12% per year. This would be the steady, consistent choice of the three credit card companies.

MasterCard is the momentum stock out of the bunch, rising from $100 in the beginning of 2007 to its current price of $335. This one is also owned by Warren Buffett, which speaks volumes about his long-term confidence in the success of credit card companies. MasterCard is enjoying this healthy stock run because of its strong earnings.

Its forward P/E is 16.05, which doesn’t look all that impressive until you look at the PEG of 0.96. It’s the earnings growth that gives MasterCard its stock momentum. They have grown earnings by 41.9% annually for the last five years and are expected to grow earnings 19.2% yearly for the next five years. Although MasterCard only pays a 0.20% dividend, the stock appreciation should more than make up for for it. If they continue to meet or beat earnings expectations, expect to see MA stock rise by at least 19% annually. If they miss expectations, however, the stock could take a nasty dip.

Visa, which is not owned by Warren Buffett, is also worth taking a gaze at. They pay a modest 0.70% dividend, and have grown earnings by 30.11% for the last five years. Visa’s forward P/E is 15.06%, and their PEG is 0.90. They are expected to grow earnings by 19% for the next five years, which is very close to MasterCard’s estimates.

It’s interesting how much lower Visa’s stock gains have been compared to MasterCard’s; MA's annual earnings of 41.9% compared to Visa’s 30.11% is a factor. However, Visa is currently trading at only 2.28 times book value per share, compared with MasterCard trading at 7.79 times book value per share. This shows Visa at a value advantage which may allow for stronger stock gains from here. American Express is trading at 2.94 times book value per share, which is also a great value.

In conclusion, I think that any of these three stocks is a good choice, but I would have to side with Warren Buffett and pick either MasterCard or American Express. I think that his choice comes down to his confidence in the strength of the company’s management. Good management will steer their businesses in the right direction, and I feel that AXP and MA have the management advantage over Visa.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.