How a Post-Brexit Boom for Credit Card Companies Can Make You Money

Reward programs and legal expenses are among the top items to look for when card-payment networks like Visa and Mastercard and lenders from American Express to Discover report quarterly earnings.
By Valerie Young ,

So corporate investment may be drying up because of concern that Great Britain's departure from the European Union will hurt the global economy?

Not to worry: Strong consumer spending, particularly in the U.S., still provides an opportunity for investors, who can tap returns through payment-processing networks like Visa (V) - Get Report and MasterCard (MA) - Get Report and lenders such as Discover (DFS) - Get Report, whose quarterly earnings reports follow those of the country's biggest banks.

"Given our concerns regarding a potential slowdown in U.S. business fixed-investment spending following the Brexit vote, we prefer consumer-oriented names like MasterCard," James Fotheringham, an analyst with BMO Capital, wrote in a note to clients. "MasterCard can deliver strong long-term earnings growth" as it benefits from an ongoing shift toward plastic and digital payments rather than cash and checks, he said.

The Purchase, N.Y-based company "has lost U.S. credit-card market share to Visa, but generally has had stronger non-U.S. growth than its rival," David Ritter, a Bloomberg analyst, wrote in a note.  Additionally, he said, Visa's integration of Visa Europe, a former subsidiary, is likely to take years and could "yield revenue opportunities for MasterCard in Europe and elsewhere."

The traditional rivals both face potential challenges from lawsuits by merchants irritated over high fees and the possibility that the so-called Brexit vote will alter regulations governing how the companies operate in Europe.

Mastercard has "under-performed the market recently because of legal issues to which we believe the market has over-reacted," BMO's Fotheringham noted. Customers in the U.K. recently filed a class action lawsuit seeking  £19 billion ($24.6 billion) in damages from the company over fees they said had been "anti-competitive" for 16 years.

Further, both Visa and MasterCard declined last month after a U.S. appeals court overturned an antitrust settlement of $7.25 billion, opening the door for potentially higher damages. The companies are simultaneously facing legal claims from retailers such as Walmart (WMT) - Get Report  and Home Depot (HD) - Get Report .

BMO rates MasterCard as an "outperform" with a price target of $120. The stock is down 5.4% this year, trading at $92.15. Analysts in a Bloomberg survey expect MasterCard to report second-quarter earnings of 90 cents a share on revenue of $2.6 billion. 

Visa, meanwhile, is forecasting revenue growth of 7% to 8% for the full year, a figure that Ritter said includes branded-card agreements with warehouse retailer Costco (COST) - Get Report  and USAA, which provides financial services for military personnel and their families. 

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Visa is up 0.6% to $78.77 on Tuesday, and BMO has a 12-year price target of $98 for the stock, which it rates as "outperform."

The San Francisco-based company is expected to report profit of 67 cents a share for the second quarter, the average of estimates in a Bloomberg survey. 

The Costco deal that's benefiting the company -- and lender Citigroup -- has been a drag on rival American Express, however.  The New York-based company's stock has fallen over 8% so far this year to $63.87.

"We expect earnings volatility to continue, as the impact of partnership losses and cost-cutting initiatives continue to play out," BMO analysts said in a note to clients that predicted lower billings. The firm is looking for more inforamtion about the costs of losing Costco and other branded-card deals as well as a cost-cutting plan and credit trends.

BMO analysts rate American Express as a "market perform," the equivalent of a neutral, and have a price target of $76.   

TheStreet's Jim Cramer, co-manager of the Action Alerts PLUS portfolio, describes American Express's past earnings performance as disappointing, but said that he is watching their small business online lending platform to see how it compares to other small business lenders like Square (SQ) - Get Report , PayPal (PYPL) - Get Report , and OnDeck Capital (ONDK) - Get Report .

American Express and other card lenders stand to benefit, meanwhile, from relatively strong consumer credit and potential spending gains from job growth and low gas prices, based on reports from U.S. banks in the past week.

Citigroup's (C) - Get Report credit cards "seem to be gaining share of U.S. spending, and loan growth has returned as well," Ritter wrote. The New York bank's CFO, John Gerspach, noted growth in average branded-card loans and purchases during an earnings call Tuesday.

And Bank of America (BAC) - Get Report  said last week that it issued 1.3 million credit cards from April through June, the most since 2008. The Charlotte, N.C.-based company, which targets customers with higher credit scores, said card balances grew $1.4 billion from the previous year, after adjusting for the sale of some loan portfolios.

More broadly, a Federal Reserve Bank of New York survey in June showed consumers had gained greater access to credit during the spring and that credit-card application rates jumped two percentage points since February to 30.6%. 

Those trends are a good omen for Discover, which reports second-quarter earnings on Tuesday afternoon.

"Given falling unemployment and low gas prices, we remain sanguine about consumer-card credit quality and, subsequently, we wish Discover would grow loans at a faster pace," BMO Capital analysts, who have a "market perform" rating on the company, said in a note to clients. 

Discover is expected to report earnings of $1.43 a share on revenue of $2.2 billion, based on the average of analysts' estimates in a Bloomberg survey. The Riverwoods, Illinois-based company's shares are down 0.7% , bringing gains over 5.7% this year. That is in line with the broader S&P 500.

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