Comparing America's 3 Largest Credit Services Companies
- Despite a still sluggish economy, consumer spending keeps increasing as does consumer debt, with credit card companies in good position to prosper, especially once interest rates begin rising.
- Mean and high price targets for the top three credit card companies range from +11% to as much as +33% over the next 12 months, representing great capital gains prospects.
- It’s a win-win-win situation in a showdown among Visa, American Express and MasterCard.
As a consumer-based economy, the U.S. thrives on the consumption of goods and services. So do credit card companies. In fact, the growth and expansion of the economy is inextricably linked to the growth and expansion of consumer credit. You might say that the U.S. economy and credit card companies are in symbiosis, a mutually beneficial relationship where one cannot flourish without the other.
Investing in credit card companies, therefore, is akin to investing in the U.S. economy as a whole. Investors must thus be aware that there is no shelter from the storm when holding credit card company stocks, as was reinforced during the 2008-09 financial crisis, when consumer spending plummeted, bringing credit card company stocks down with it.
When consumer spending in the U.S. fell from a record $10.073 trillion in Q2 of 2008 to $9.8015 trillion by Q2 of 2009 as noted above, credit card company stocks fell as hard and harder than the broader market as noted below. While Visa's stock (NYSE: V ) matched the S&P 500's loss of 50% during the worst of it, MasterCard (NYSE: MC ) fell 60% and American Express (NYSE: AXP ) plunged 80% during their worst spans.
But as the economy regained its footing with a helping hand from the U.S. Federal Reserve's flooding of the marketplace with an abundance of cheap money, consumer credit became more readily available again. Consumer spending took only six quarters to break its pre-crisis record, setting a new all-time high of $10.169 trillion by Q4 of 2010. And it hasn't looked back since, reaching $10.912 trillion this Q2.
Have credit card stocks followed suit? You had better believe it. Since the recovery began in March of '09, where the broader market S&P 500 has gained nearly 200%, V has jumped 325%, MA has soared 425%, and AXP which was hit the most during the crisis has benefited the most with a monumental rise of 720%, as noted below.
Yet similar to major bank stocks, credit card stocks have been stagnating (show in red above) since the Federal Reserve started reducing its QE3 stimulus spending at the start of this year. With rising interest rates no more than about a year away, credit is going to become more expensive, and consumer credit default risk will increase.
Is this it for the spectacular moonshot of credit card companies, then? Should investors get out while the getting is good and leave credit issuers behind? Not on your life, or their stocks will end up leaving you behind. While rising interest rates will increase the cost of borrowing, they will also increase profits for lenders.
Remember that the Fed won't raise rates until it is confident the economy can handle them. Thus, any increased risk of credit default will be counterbalanced by an increase in employment, wages and consumer ability to support debt. Just one look at credit card companies' future growth prospects cements that expectation, with analysts overwhelmingly recommending strong buys for all three stocks highlighted here, with one-year price targets running as high as +30%.
To help us pick the best prospect among U.S. credit services companies, let's take a look at the finances and future estimates of the largest three using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table.
A) Financial Comparisons
The three credit card companies compared here are the largest companies by market cap belonging to the Credit Services industry of the Financial sector. As we compare each metric, the highest ranking company will be shaded green while the lowest ranking will be shaded yellow, which will later be tallied for the final ranking.
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recent quarter, MA enjoyed the highest revenue growth year-over-year, while V saw the highest earnings growth. None of the three experienced any shrinkage in either metric.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of the three, V's profit and operating margins are the best, with AXP's being the worst (though it still posted enviable margins nonetheless).
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
In this comparison, MA's management is performing best in generating the highest returns on assets and equity, while its two competitors lag behind
by quite a distance.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, AXP provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, although the other two contestants finish close behind.
• Share Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where stock price relative to sales and company book value come under scrutiny, where lower ratios represent better value.
Among our three combatants, AXP's stock price is the cheapest relative to all three metrics by a wide margin, indicating its stock is currently undervalued and contains a good deal of coiled-up value waiting to be unsprung.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, AXP offers the best earnings per share (NYSEARCA:EPS ) percentages in all four time periods, while MA offers the worst, though still pretty close to V's.
• Earnings Growth: For long-term investors, this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
V's EPS growth prospects are the best in three of the five time periods, while MA's are the best in the other two. AXP's EPS growth expectations, strong as they may be, lag behind the others.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
MA wins this category, though not by very much, while AXP's price targets are somewhat lower. This is somewhat of a surprise, however, given AXP's lower price ratios considered above. Perhaps its lower EPS growth prospects are the reason why AXP's stock is trading at lower valuations and is not expected to rise as much as its rivals'.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, MA comes best recommended with 11 strong buys and 16 buys representing 32.35% and 47.06% of its analysts respectively. Meanwhile, V comes with 10 strong buy recommendations and 18 buys, followed by AXP with 7 strong buy and 5 buy ratings.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
It's a draw! In a very tight race, two contestants tied for first place, while the third was so close behind that investors should do well with any of them. MasterCard, which outperforms its two competitors in 9 metrics, finished with a net score of +1, while Visa which outperformed in 8 metrics also finished at +1. American Express, while outperforming its peers more often in 12 metrics, also underperformed more often in 14, finishing with a net score of -2.
As consumer spending continues to rise and consumers' ability to shoulder debt continues to improve, credit card stocks should resume their upward climb as the soon-to-be rising interest rates increase their revenues and profits. With impressive EPS growth estimates and overwhelming buy and strong buy recommendations, investors should do well for years to come with any of the three credit card giants compared here.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.Source: m.seekingalpha.com