Consumer-Led Recovery Bolsters Consumer Finance Stocks
|Written by GSCR Staff|
|Wednesday, 27 November 2013 09:15|
We have a lot to be grateful for this Thanksgiving. Since 2009, the consumer has been largely credited with the economic rebound that we are enjoying. The federal government bailout, new technologies, mobile payments and prepaid accounts have been changing the way we do business and, in our view, will change the way people pay around the world for the next few years. In other words, micro foundations are changing the macro picture in a profound way.
Consumer finance companies, like Discover Financial Services (NYSE – DFS -$53.04), American Express (NYSE – AXP - $85.09), and Capital One Financial (NYSE – COF - $70.81), have benefited and supported this growth. Not only have these companies enjoyed higher revenue and earnings growth than their peers in the financial sector, their shareholders have realized higher returns than those of the stock market and most stocks in the financial sector.
Both DFS and AXP reported a Return on Equity (ROE) approximating 24% for the first three quarters of 2013. By contrast, COF realized an ROE under 8%. So, let’s compare the prospects of DFS and AXP.
DFS is an online bank and electronic payment services company. It offers Discover Card-branded credit cards, personal loans and deposit products to more than 50 million individuals and small businesses over the company's proprietary credit card network in the
The stock has been performing well this year and it has good prospects to continue expanding its direct consumer finance and banking business for the next few years. Steady loan growth and common stock repurchases have been key drivers behind its solid performance. Credit quality is also the best it has been in more than 14 years because it is applying higher credit standards since the recession. In addition, it has been boosting volumes by increasing market share and attracting new account sales.
AXP is a leading global service firm established in 1850. Its principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses worldwide.
As expected, AXP continues to benefit as consumers and businesses have been increasing their spending in a more stable economy. This trend could continue for the next few years. Spending increases along with a growing loan portfolio have been the key drivers bolstering net interest income and in turn AXP’s strong showing. AXP’s customers generally have good credit scores too. So, AXP has been reducing its loan loss provisions. In other words, while AXP’s near- and long-term prospects look sound, current valuations appear to fully reflect those prospects.
On a relative basis, we have a strong buy opinion on DFS shares because its stock has a more attractive valuation than AXP. DFS shares closed near an all-time high at $53.04 yesterday. In other words, it trades at only 10.4 times the consensus 2014 earnings estimate. On the other hand, AXP shares look fully valued. Its stock hit an all-time high closing at $85.09 yesterday. It is trading at 15.7 times the consensus 2014 EPS estimate.
The bottom line? DFS may be the best way to play the continuing rise in consumer finance stocks and a potentially higher growth economy.
Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.
This Market Monitor blog was prepared for informational purposes only. Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces research via two formats: Goldman Select Research, which typically highlights small cap companies, and Goldman Opportunity Research, which features micro cap companies in a sponsored research format. Thus, the Select product reflects the Firm’s internally generated stock ideas while the Opportunity product reflects sponsored research reports.
Goldman Small Cap Research is not affiliated in any way with Goldman Sachs & Co.
It is important to note that while we may track performance separately, we utilize the same coverage criteria in determining coverage of all stocks in both research formats. Please view the company’s individual disclosures for each engagement, which can be found in each company-specific report. All information contained in this blog, newsletter and in our reports were provided by the Companies or generated from our own due diligence. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence. Analysts are compensated on a per report basis and not on the basis of his/her recommendations.
The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, or other firms. Goldman Small Cap Research relied solely upon information provided by the Company through its filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Such information and the opinions expressed are subject to change without notice. A Goldman Small Cap Research blog, report, note, or newsletter is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed.
This blog does not take into account the investment objectives, financial situation, or particular needs of any particular person. This blog does not provide all information material to an investor’s decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Neither Goldman Small Cap Research, nor its parent, is registered as a securities broker-dealer or an investment adviser with FINRA or with any state securities regulatory authority.
ALL INFORMATION IN THIS BLOG, REPORT OR NEWSLETTER IS PROVIDED “AS IS” WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY, OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION.
For more information, visit our Disclaimer: www.goldmanresearch.com
Leave your comments