3 Solid Credit Card Stocks With Up to 28% Upside (Update 2)

Updated with market close information.

NEW YORK ( TheStreet) -- With credit card master trust data indicating that card loan quality is trending better this year than he expected, KBW analyst Sanjay Sakhrani on Thursday reiterated his "Buy" ratings for Discover Financial Services ( DFS), Capital One ( COF) and the credit card gold standard, American Express ( AXP).

Sakhrani said that that based on January reports by the major credit card loan securitizers, "average industry charge-offs still remain in favorable territory as they continue to stay below normalized levels of roughly 5%."

The analyst added that "delinquency trends continued to be constructive, with the card issuers posting sequential movements that were in-line to better than typical seasonal trends seen in January," although loan balances declined during the month, "as expected."

During January, the average charge-off rate among the seven issuers detailed in KBW's report declined to 4.25%, improving from 4.36% in December and 6.69% in January 2011.

Major credit card players seeing continued improvement included American Express, with the lowest charge-off rate of 2.25% in January, improving from 2.28% in December, while World Financial Network -- a subsidiary of Alliance Data Systems ( ADS) -- had the highest charge-off rate of 6.07%, improving from 6.39% in December.

Bank of America ( BAC), saw its January credit card charge-off rate decline to 5.63% from 6.05% in December. Discover's charge-off rate declined to 2.75% in January, from 3.15% the previous month.

Major card securitizers seeing increased January charge-off rates included Capital One, with a 3.54% charge-off rate, compared to 3.43% in December; JPMorgan Chases's ( JPM) Chase Issuance Trust, with a charge-off rate of 4.25%, increasing from 4.11% in December; and Citigroup ( C) subsidiary Citibank, with a charge-off rate of 5.27%, increasing from 5.11% the previous month.

Discover's shares have returned 23% year-to-date, through Thursday's close at $29.58.

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The shares trade for nine times the consensus fiscal 2012 earnings estimate of $3.36 a share, among analysts polled by Thomson Reuters.

The company reported a return on average equity (ROE) of 30% for its fiscal 2011, ended Nov. 30.

Sakrhani reiterated his "Outperform" rating for Discover, with a $32 price target, saying "sequential improvements in both charge-offs and delinquencies outperformed seasonal trends, with charge-offs improving by double the amount typically seen in January and delinquencies actually modestly declining relative to the typical 15-20 bps increase seen during the month.

Sakrhrani is ahead of the consensus, estimating that that Discover will earn 43.48 a share during fiscal 2012, although his $3.10 EPS estimate for fiscal 2013 is behind the consensus estimate of $3.37.

Interested in more on Discover Financial Services? See TheStreet Ratings' report card for this stock.

Shares of Capital One Financial closed at $49.29 Thursday, returning 17% year-to-date.

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The shares trade for 8.5 times the consensus 2012 EPS estimate of $5.79.

The company's 2011 ROE was 11.07%, according to HighlineFI.

Of course, the biggest news for Capital One is the Federal Reserve's long- delayed approval late Tuesday of the company's $9 billion deal to purchase ING Direct (USA) from ING Groep ( ING), for roughly $9 billion in cash and stock. The approval of the ING deal sets the stage for the Office of the Comptroller of the Currency to approve Capital One's next major deal, to purchase HSBC's U.S> ( HBC) credit card portfolio, for $2.6 billion, which is expected to include a common equity raise of up to $1.25 billion.

Sakhrani rates Capital One "Outperform," with a $62 price target, and estimates the company will earn $5.64 a share in 2012, followed by EPS of $5.53 in 2013.

The analyst noted that Capital One's managed credit card portfolio average loan balances of $85.9 billion in January were flat from December, but rose 8% from a year earlier.

Interested in more on Capital One? See TheStreet Ratings' report card for this stock.

Shares of American Express ( AXP) closed at $52.87 Thursday, returning 13% year-to-date.

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The company reported a very strong 2011 ROE of 27.7%.

The shares trade for 12 times the consensus 2012 EPS estimate of $4.23.

Sakhrani rates American Express "Outperform," with a price target of $66, saying on Thursday that the company's credit card "charge-off and delinquency rates moved contrary to typical seasonal trends in January as both typically increase about 15 bps on average during the month."

American Express's January 30+ days delinquency rate for January on managed credit card portfolios was an industry-leading 1.57%, inching up slightly from 1.53% in December, but improving from 2.16% in January 2011.

Interested in more on American Express? See TheStreet Ratings' report card for this stock.

>>To see these stocks in action, visit the 3 Solid Credit Card Stocks With Upside portfolio on Stockpickr.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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