1 Consumer Financial to Buy, 2 to Avoid

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It's no secret that the economy has been growing at a sluggish rate. This has led several economists to argue that a double dip could happen. But, if you are as bullish on the economy as I am, it is now an ideal time to buy consumer financials off of these fears. 

Amex (NYSE: AXP): Growth Continues Despite Macro Challenges

With the economy performing better than economic forecasts in recent months, it should not be surprising that Amex outperformed the S&P 500 by ~625 bps with a return of 18.4%. It now trades at a respective 12.9x and 11.8x past and forward earnings and is forecasted for 10.3% annual EPS growth over the next five years. For comparison, consider that the 5-year average PE multiple on the stock is 14.7x. Analysts are still on the fence about the stock and rate it around a "hold."

Perhaps the pessimism stems from weak operational performance in recent quarters. 3Q12 results featured an annual decline in EBIT as domestic card services fell 5% and cardmember spending growth decelerated 200 bps to 5%. However, billed business was up 6% sequentially and cardmember loan growth has inched towards the peak levels seen in 4Q07. Plus, management is optimistic about growing EPS in the next quarter even without settlement payments, depressed reserve releases, and a weak European economy.

I am further optimistic about the company's partnership with Wal-Mart in offering consumers the ability to pay bills through mobile devices without even using a debit or checking account. This will not only mitigate headwinds from financial reform but also help build greater demand among low-income consumers. While this transitions Amex from more of a premium brand into a commoditized name, I believe this is for the better: Whatever part of Amex's market it loses, it will be more than offset by lower risk from greater market diversification.

Visa (NYSE: V) & Mastercard (NYSE: MA) Both too Expensive to Justify an Investment

Mastercard nevertheless had a more indisputably strong quarter with EPS of $6.17 coming out $0.24 ahead of consensus despite a weak 5% y-o-y growth in revenue. Adjusting for FX headwinds, growth was 10%. Over the last six months, however, it has been virtually flat while competitor Visa has appreciated by 12.3%. Visa, in fact, is near its 52-week high after gaining 56.5% from its 52-week low. Analysts are nevertheless about equally bullish on both stocks, rating them around a "buy."

Mastercard's management still cites improving consumer confidence that pushed consumer expenditures higher. And, even in Europe, processed transaction and volume growth has still continued. If the company is able to achieve its net revenue CAGR target of 11-14% over the next three years, it will offset the impact from multiples compression as investors head over to cheaper stocks during a full recovery.

This brings me to my last point: the price tag. Visa and Mastercard are expensive at 19.3x and 19.9x forward earnings, respectively, which is quite expensive in light of the double-digit growth forecast for Amex. Accordingly, I recommend holding out and preferentially buying Amex - a much cheaper alternative for similar growth.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of MasterCard. Motley Fool newsletter services recommend American Express Company and Visa. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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