NEW YORK (TheStreet) -- In a shrinking market for credit card lenders, Nomura analyst Bill Carcache on Monday said that investors should focus on "issuers focused on the high quality side of the credit divide."
Through the credit crisis, American consumers have been deleveraging, with credit card loan balances totaling $820 billion as of April 30, "down 19% from their December 2008 peak of just over $1 trillion," according to Nomura, with JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C) and Capital One (COF) seeing their card portfolios shrink by 25% or more, while American Express (AXP), Discover Financial Services (DFS) and Wells Fargo (WFC) "have seen their portfolios shrink by [nearly] 18%."
Carcache on Monday upgraded American Express to a "Buy" rating from "Neutral," while downgrading Capital One to a "Buy" rating from a neutral rating, and sticking with his "Buy" recommendation for Discover.
On the card space in general, the analyst said "while we'd like to be more bullish, we see the decline in balances as structural in nature (driven by regulatory changes and unbreakable consumer de-leveraging)," and that in light of "an uncertain environment where the risk of another recession is elevated," Nomura was "cautious on lend-centric businesses that derive most of their profitability from spread."Shares of American Express closed at $58.41 Monday, returning 25% year-to-date, following a 12% return during 2011. The shares trade for 3.4 times tangible book value, according to Worldscope data provided by Thomson Reuters, and for 12 times the consensus 2013 earnings estimate of $4.78 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.33. Based on a 20-cent quarterly payout, the shares have a dividend yield of 1.37%. Carcache on Monday assumed Nomura's coverage of American Express and upgraded the name to a "Buy" rating, while increasing Nomura's price target for the shares to $69 from $52, saying the company's "elevated levels of investments in fee-based businesses during 2010 and 2011 have placed it at the forefront of the digital transformation that is shaping the payments industry." The analyst added that "AXP's spend-centric business model has also been producing healthy billings and revenue growth through what has been a low-growth recovery period, as the company's core affluent customer base (the envy of the industry) has continued to spend." Nomura also expects American Express to have continued success in cutting its expenses, with "another $0.34 of potential upside to EPS to the extent management achieves its target" during 2013. American Express is continuing to make investments to grow its non-credit fee-based payment businesses, and Carcache expects "the contribution from fee-based business revenues to grow from less than 3% in 2008 to ~8% in 2014," contributing to "to the evolution of Amex into a lower-risk, higher-return business." The company was very strongly capitalized as of March 31, with a Tier 1 common risk-based capital ratio of 13.4%, and it generates significant capital from earnings, with a first-quarter return on average equity of 27.1%, compared to 27.9% a year earlier. American Express received Federal Reserve approval in March to return up to $4 billion to investors through dividends and share repurchases during 2012, with another $1 billion approved for the first quarter of 2012. Carcache said that Nomura's "model suggests that AXP will have ~$2.7bn in excess capital, after paying out $12.5bn in dividends and repurchases over the next three years." American Express will report its second-quarter results on July 19, with analysts expecting a profit of $1.09 a share, increasing from $1.07 in the first quarter, and also in the second quarter of 2011. Carcache estimates the company will post second-quarter earnings of $1.08 a share, and estimates full-year EPS of $4.38 for 2012, followed by EPS of $4.96 during 2013. Interested in more on American Express? See TheStreet Ratings' report card for this stock.
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