Surging Credit Card Stocks Show Economy on the Mend

by Dan Burrows | October 31, 2012 1:55 pm

In a sign that consumer spending patterns are slowly returning to normal after a long period of paying down debt, Americans are back to flashing plastic at the register.

That has been a boon to credit-card company profits and share prices — and it’s a trend that looks sustainable even as other parts of the economy look increasingly uncertain.

MasterCard (NYSE:MA[1]), the second-largest payments network after Visa (NYSE:V[2]), reported quarterly earnings Wednesday that beat Wall Street estimates by a healthy 25 cents a share.

True, in a refrain that has become all too familiar this earnings season, MasterCard’s revenue missed analysts’ average estimate. The underlying results, however, were encouraging, sparking a sharp rally in MA shares in an otherwise flat-to-down market.

Confirming a trend seen across the industry, MasterCard said it processed 24% more transactions year-over-year, or 8.7 billion globally. Business was robust overseas, but perhaps more important was that Americans increased their MasterCard spending by 7%.

Consumer spending accounts for 70% of all economic activity. Although debt has become something of a four-letter word in wake of the financial crisis, the fact that folks are expanding their use of consumer credit shows that Americans’ personal balance sheets are healthier than they’ve been in years.

Indeed, Americans are spending more using credit cards than with either cash or checks for the first time since 2006, write analysts at Trefis, and the trend is only expected to continue into the future.

“Even outside the U.S., there has been increasing use of cards for making payments,” Trefis notes.

That has led credit-card company stocks to put up some market-beating and — in some cases — eye-popping gains in 2012.

American Express (NYSE:AXP[3]) missed Street estimates[4] when it posted quarterly results, hurt by sharp declines in its international business and tough comparisons, but AXP still saw remarkable transaction and spending growth, as well as an improvement in credit quality. Meanwhile, the Dow component is up nearly 18% year-to-date. That bests the broader market by more than 5 percentage points, and yet AXP actually is the laggard among its peers because the sector has been so darn strong.

Visa, which reports after the markets close today, is up 35% for the year-to-date, and if results come in as they should, investors can expect more upside ahead. Earnings per share are forecast to pop 18% on a 12% gain in revenue, according to data from Thomson Reuters.

Visa has beaten Street profit estimates for eight consecutive quarters and surpassed top-line forecasts for three straight quarters. If history is any guide, we should get another better-than-expected report out of the firm.

Most impressive, however, have been shares in upstarts Discover Financial Services (NYSE:DFS[5]) and Capital One Financial (NYSE:COF[6]), which are up 68% and 42%, respectively, in 2012.

Yes, pretty much everything tied to credit cards and payment processors is going gangbusters this year, but even by those lofty standards, Discover stands out. It is by far and away InvestorPlace’s top stock pick[7] of the year (even if we didn’t let it into our 10 Best Stocks for 2012[8] competition). Where most credit-card companies are struggling to add customers, Discover has been rapidly expanding its portfolio[9]. At the same time, late payments and defaults are hitting record lows.

Like Discover, Capital One — the officially leading pick for 10 Best Stocks for 2012 — has been growing its consumer credit portfolio like crazy[10], both organically and through acquisitions. Of course, COF is much more than a payments processor, but the credit card business has been the one juicing results. Indeed, most of COF’s 14% surge in revenue last quarter was thanks to its acquisition of HSBC‘s (NYSE:HBC[11]) credit card operations earlier this year.

Crazy as it sounds, after a long period of retrenching, it’s actually good to see Americans taking on more debt. An expansion in consumer credit — and growth for credit card companies — means the economy is indeed slowly on the mend.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

  1. MA:
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  3. AXP:
  4. missed Street estimates:
  5. DFS:
  6. COF:
  7. top stock pick:
  8. 10 Best Stocks for 2012:
  9. Discover has been rapidly expanding its portfolio:
  10. growing its consumer credit portfolio like crazy:
  11. HBC:

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