3 Credit Card Giants Primed For Long-Term Growth

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 While many of the country's commercial banks are having a difficult time growing their balance sheets or maintaining their interest margins, credit card issuers are having no problems, growing their balance sheets either through internal growth or through acquisitions. In this article, I will analyze three large credit card issuers.

American Express (NYSE: AXP) dates to pre-Civil War America. It was allowed, along with other large financial concerns such as Goldman Sachs (GS) and Met Life (MET) in late 2008 to obtain bank holding status in order to qualify for government backed funding when private credit markets had largely dried up. Four years later, while American Express does not resemble in its asset diversification a traditional bank, it is much a “bank” as say, Bank of America (BAC), Citigroup (C) or JPMorgan Chase (JPM).

I have never really approached looking at American Express as a bank. But it will be examined again this winter in the Federal Reserve's stress test, and I will give it the same examination I do to any other bank. With assets of about $158 billion, American Express ranks as the country's 19th largest bank holding company. In its third quarter, it continued its steady earnings growth with revenues up four percent versus the third quarter of 2011 at $7.86 billion, and profits up one percent, to $1.25 billion. Due to American Express' share buyback activity, the per share earnings rose six percent, to $1.09 per share.

Here is where things get interesting from a bank perspective. Those profit numbers represent a 3.2% return on assets, and a 26.3% return on shareholders’ equity. Those numbers make even superstar banks like U.S. Bank (USB) look amateurish.

About 40% of American Express' assets are in its loan portfolio. That compares with 40% at Bank of America, 34% at Citigroup, and 31% at JPMorgan. More “traditional” commercial banks typically have a loan to asset ratio of .60 to .70.  But what American Express has is a hugely profitable travel and credit card unit that delivers consistent results far outstripping the investment banks owned by the likes of JPMorgan. Because American Express caters to a wealthier demographic than other card issuers, its write offs are a small fraction of other banks' rates.

American Express profits have rambled ahead, and it is all but guaranteed to set an all-time high this year. But the stock price has generally lagged. I see American Express as significantly undervalued as it trades at its current PEG of 1.1. The company's balance sheet is strong, stock buybacks will continue, and the dividend is very likely to be raised upon the stress test results in the first quarter of next year. I see this company as a core, long-term holding for many growth and income investors.

The folks in charge of Visa (NYSE: V) sure know what they are doing. The company has experienced rapid growth as cash loses popularity throughout the world. But since the company does not carry the consumer debt on its books, it does not have to deal with collections or loan losses. Visa revenues are a function of a fee based model of transaction payment processing and ATM fees.

In the fiscal year that ended September 30, Visa posted revenues of $10.4 billion, up 13% from the year earlier, and profits of $4.2 billion, or $6.20 per share, about 24% above the year ago. Growth was particularly strong overseas. There is no sign of this rapid growth slowing down either, as consensus fiscal 2013 earnings are for $7.25 per share. Visa has also hiked its dividend twice in the past year, now offering a yield of 0.9%, and announced a $1.5 billion stock buyback.

Visa is not cheap after a year to date price rise of 51%. But earnings have advanced so it now sells at a PEG of just 1.0, and I can see this stock doubling from even its current price over the next few years if the world economy solidifies some. The company has no long term debt and over two billion dollars in the bank. This is a winner for those seeking capital growth.

Capital One Financial (NYSE: COF) is the nation's twelfth largest bank holding company with just over $300 billion in consolidated assets. Much of those assets are tied into the enormous receivables Capital One carries on behalf of its credit card clients.

Capital One is coming off a brilliant third quarter, in which earnings rose 44% from the year earlier quarter to $1.17 billion, or $2.01 per share. This represented a 1.6% return on assets. The per share amount was “only” a 14% gain as there were more shares outstanding that were used to pay for the very acquisitions that gave rise to the big earnings boost. Those were, the purchase of ING Direct and its online customer base, and then the purchase of HSBC's (HBC) domestic credit card business. The surge of assets has caused Capital One's capital levels to ebb a little, but it is committed to driving those up to a Basil 3 level of 8% by the middle of next year. With Capital One's strong earnings, and minimal dividend, that ought not to be much of a stretch.

Capital One now trades with a PEG of a little under one, and strong analyst support with a mean recommendation of 1.9. I see Capital One as another strong play for long-term growth investors.

StockCroc1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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