What’s in your wallet?
Chances are you have at least one credit card from the major issuers—Capital One Financial (COF), Discover Financial (DFS) or Visa (V). But while these companies may offer similar products, their latest quarterly results demonstrate that not all credit card companies are created equally. So with credit card spending on the rise, let’s see which of the three gets the best “credit score” from my Portfolio Grader screening tool and what you should do as a retail investor.
Good Credit: Visa
With operations in over 200 countries and the capability to handle over 24,000 transactions per second, Visa is a crucial player in the global credit card market. What’s interesting about Visa is that the company does not issue card itself, extend credit or set rates and fees. Instead, the company uses its advanced processing network to connect consumers, businesses, banks and governments. The company basically promotes access to electronic payments.
I mention Visa first because this company just reported solid results for the fourth quarter. Last quarter, the company’s investments in products and technology and in high growth markets started to pay off. Visa reported a 13% jump in payments volume growth and a 14% rise in total processed transactions compared with Q4 2012. This helped to drive a 9% gain in net operating revenue, which rose to $3.0 billion. This just missed the $3.02 billion consensus sales estimate.
Meanwhile, quarterly profit declined 28% to $1.19 billion. This was mostly because the company recorded a $74 million tax benefit in year ago period. Excluding special items, net income advanced 15% to $1.2 billion, or $1.85 per share. This matched analyst estimates.
One of the best details was that the company is launching a new $5 billion stock buyback. This is on top of a previously announced 21% hike in its quarterly dividend. To all of the yield seekers out there, V goes ex-dividend on November 13, so shareholders of record will receive 40 cents per share on December 3. This Conservative stock is a B-rated buy.
Average Credit: Discover Financial
Discover is known for being leading innovator in the credit card industry. The company is best-known for issuing Discover-brand credit cards, which are used by more than 25 million members. The company also licenses Diners Club credit cards, offers banking services, issues student loans and runs the PULSE Network ATM system.
Last week, Discover Financial Services reported mixed results for the third quarter. To start, the company set aside $333 million to cover future defaults, up from $136 million a year earlier. This larger reserve weighed on the credit card company’s bottom line; compared with Q3 2012, net profit declined 7% to $593 million, or $1.20 per share. Analysts had forecast earnings of $1.21 per share so Discover posted a modest earnings miss.
However, the company reported solid sales growth as consumers ramped up credit card usage. Compared with the same quarter last year, credit card loans rose 4% and revenue advanced 3% to $2.06 billion. This was in line with analyst estimates.
We would have all liked to have seen stronger results, but the stock is a hold, and not a sell, for several reasons.
First, the company is in the middle of a multi-billion-dollar stock buyback program which should continue to support earnings. Second, Discover Financial is continuing to expand beyond the credit card business. Discover Home Equity Loans launched in August, allowing the company to profit from the housing recovery. The company is also benefitting from growing origination volumes in student and personal loans. Third, while the company is being conservative with its loan loss reserve, card charge-offs and overdue credit card loans improved last quarter.
Poor Credit: Capitol One
Since the early 1990s, Capital One (COF) has been one of the nation’s leading credit card companies; it currently ranks at fourth. With over $20 billion in revenue in year, Capital One has amassed the sixth-largest deposit portfolio in the U.S. In addition to issuing cards, the company also has a hand in personal and retail banking, home loans and auto loans.
This company is known for rewarding its shareholders. The stock currently yields 1.7% and the company is in the middle of a billion-dollar stock buyback program. But not even the stock’s value-added benefits could get me to recommend it—especially not after it announced third-quarter results a few weeks ago.
In the third quarter, Capitol One posted a drop-off in third-quarter profit due to higher costs and lower net interest income. Net income slipped to $1.1 billion, or $1.86 per share, while revenue slid to $5.65 billion. While sales and earnings beat estimates, investors couldn’t shake off the fact that 2013 profits are lower than last year.
So COF shares have retreated over 3% since the earnings announcement. This doesn’t seem like much at first, but consider that shares of both Visa and A-rated competitor MasterCard (MA) have jumped 4% over the same period, while B-rated rival American Express (AXP) has gapped up nearly 9%. Meanwhile, DFS shares have remained flat.
There is a clear discrepancy between COF and the others in terms of institutional buying pressure, so I consider this a red flag. COF is a D-rated sell, at least until the stock attracts more buying pressure.