Credit Card Stocks DFS, AXP, V, COF and MA

Introduction

Now more than ever may be the best time to consider investing in a credit card company. As unemployment approaches 10% and the upcoming 4^th quarter Christmas shopping season. Larger amounts of consumers are going to have to cut back their Christmas spending or more likely put more purchases on their credit cards. There is also a high amount of risk in this industry. I am going to do a Cross Sectional Analysis on five of the largest credit card companies, analyze the risk involved with the industry and determine on a relative basis which stock is undervalued

Industry Outlook

Recently Congress passed the Credit CARD Act which seeks to regulate the ability of credit card companies raising their interest rates freely, and also requires more disclosures. Every year Americans pay $15 billion in penalty fees and 44% of Americans carry a credit card balance according to the White House. The new law seeks to protect consumers and limit the amount of penalties and interest rate increases a credit card company can implement. One example is the ban of Retroactive rate increases, meaning the rates on outstanding balances cannot be raised. The bill already back fired on consumers as many credit card companies drastically increased their rates before the bill was signed into law; with the exception of a few such as Discover. What this means is the law may not have the significant impact congress intended, which is good for the credit card companies.

Risks

A recent gallop poll shows the average consumer’s expected Christmas spending is $740 vs. $801 the same time this year in 2008. Although it is not a significant difference; as consumers approached the holiday season their expectation went from $801 to $639 from October to December in 2008. If consumers follow the same trend this year there may not be a jump in credit sales.

Some unemployment can be good for debt focused companies but too much can be harmful. If consumers pile on credit card debt and cannot make payments consumers will either be forced to settle the debt for less or enter bankruptcy, both of which will hurt credit card companies.

There is a certain amount of legislative risk as proposals have been introduced to change bankruptcy laws, which could lead to a furry of bankruptcy claims.

Cross sectional analysis

Valuation	Discover Financial (DFS)	American Express (AXP)	Visa (V)	Capital One (COF)	MasterCard (MA)
P/E	5.6	20.5	70.9	N/A	39.2
P/B	1.2	3.1	2.8	0.7	11.2
P/S	1.1	1.6	15.6	1.3	6
P/CF	1.8	10.4	101	3.9	46.1
D Yield	0.54	2.19	0.68	0.46	0.26
Forward P/E	18.8	18.8	21.55	42.4	17.8
Wall St. Rec. Sell (5) Hold (3) Buy (1)	2.4	2.7	1.6	2.6	1.4
	Hold/Buy	Hold	Buy	Hold	Buy

(To see a comparison between the 5 companies go to) http://www.google.com/finance?chdnp=1&chdet=1256560294421&chddm=79764&cmpto=NYSE:DFS;NYSE:AXP;NYSE:COF;NYSE:MA;NYSE:V&cmptdms=0;0;0;0;0&q=dfs,axp,cof,MA,v&ntsp=0

Conclusion

When evaluating these companies using cross sectional analysis Discover Card is the winner and can be considered undervalued. As a value investor my choice would be DFS. But if you view yourself as a growth investor Master Card would then be the best choice because when we use growth in our calculation of the P/E i.e. Forward P/E it now becomes the lowest P/E stock. Being a growth investor you would more than likely overlook the current high valuation ratios and focus more on a forward P/E and maybe also add in the PEG ratio.

Time and resources will not permit me to go into detail on Discover (DFS) or Master Card (MA) but I plan on having more time in the near future and you can expect a more detailed report on these stocks and less industry emphasis.