Credit Card Stocks are Hot Again: Goldman Sachs

NEW YORK ( TheStreet) -- Goldman Sachs on Friday upgraded its rating for Discover Financial ( DFS) to a "Buy" from a neutral rating, and upgraded the credit card sector to "Attractive" from "Neutral."

Discover on Wednesday reported net income of $624 million, or $1.18 a share, for its fiscal first quarter ended Feb. 29, increasing from $459 million, or 84 cents a share, a year earlier, and blowing past the consensus EPS estimate of 94 cents, among analysts polled by Thomson Reuters.

Discover's earnings beat was fed by a $226 million release of loan loss reserves, but the company also saw revenue net of interest expenses increases 6% year-over-year, with total loans growing 9% from a year earlier, to $56.3 billion, as of Feb. 29.

During the company's investor day presentation on Thursday, Discover's executives targeted annual earnings growth in a range of 10% to 15%, with a target return on equity of over 15%.

Following the completion of this year's Federal Reserve stress tests, Discover announced a $2 billion share repurchase authorization, while leaving its quarterly dividend unchanged, at 10 cents a share.

Discover's shares returned 35% year-to-date, through Thursday's close at $32.49. The shares trade for just over twice the company's reported Feb. 29 tangible book value of $15.82, and for just under nine times the consensus 20123 EPS estimate of $3.68.

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Goldman Sachs analyst Ryan Nash on Friday upgraded his firm's rating for the entire credit card space to "Attractive," from "Neutral," saying he saw further upside, as "we believe credit losses will stay lower for longer, driving EPS estimates higher," and that following the stress tests, "excess capital remains underappreciated." Nash also said that "low rates should push cost of funds lower and support margins."

The analyst also said that credit card lenders were trading at relatively low multiples to forward earnings, "at just 9.6x 2013 EPS vs. 12.4x for financials."

Nash upgraded his rating for Discover to a "Buy," from a neutral rating, while raising his price target for the shares by 8% to $39, while raising his fiscal 2012 earnings estimate to $4.05 a share from $3.60, and his 2013 EPS estimate to $3.90 from $3.55.

Nash added that after Discover completes its $2 billion buyback, "we still see $3bn of excess capital which the market is ascribing minimal value to at this point."

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

Nash left his "Buy" rating for American Express ( AXP) unchanged, but raised his price target to $67 from $60, saying that "catalysts to drive shares higher" include its $5 billion share buyback authorization announced last week, "execution on its recently announced expense plan," and "robust spending volumes, as we look for 12% billed business growth in 2012 with further international expansion a key driver."

American Express's shares returned 225 year-to-date through Thursday's close at $57.29.

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American Express trades for 12 times the consensus 20123 EPS estimate of $4.73.

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

Nash left his neutral rating for Capital One Financial unchanged, with a price target of $62, saying "we do see upside to the shares as investors become more comfortable with its 2013 earnings profile. While most of the headwinds from COF's acquisitions are behind it (though the 9.7% ING ownership remains an overhang), we believe focus will shift to integrating ING and HSBC, and executing its strategy, which are not without risks."

Capital One's shares returned 29% year-to-date, through Thursday's close at $54.42.

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Following the recent completion of Capital One's long-delayed acquisition of ING Direct, the company expects soon to complete its purchase of HSBC's ( HBC) $30 billion U.S. card portfolio for a $2.6 billion premium having been received. Capital One priced a $1.25 billion common equity offering last week.

Capital One's shares trade for eight times the consensus 2013 EPS estimate of seven dollars.

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

-- 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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