Give Your Portfolio Some Credit

Companies highlighted in this weeks Investment Ideas include Mastercard, Inc. (MA - Snapshot Report), Visa Inc. (V - Snapshot Report), American Express (AXP - Analyst Report) and Discover Financial Services (DFS - Snapshot Report).

In spite of the global economic collapse that has left a trail of smoke and ash across the credit markets and severely dented consumer spending, consumers continue to utilize their credit cards as a measure of convenience and a source of short-term liquidity.

Credit Is Convenient

In the old days (80's and 90's), the infrastructure didn't yet exist to support the wide-spread use of non-monetary exchanges. But now, with credit swiping machines at every fast food restaurant and grocery store under the sun, pulling out the plastic saves time and money by avoiding the trappings of the insidious ATM machine, inconveniently located and overpriced. Why pay $2 for a $20 withdrawal when you can save time and money by passing along transaction costs to merchants?

Beyond convenience, credit cards have become a staple and relied upon source of short-term liquidity for the majority of Americans who live "pay-check to pay-check." With incomes and spending fluctuating wildly due to economic volatility, the credit card frequently becomes the option of first resort to satisfy short-term obligations.

Credit Card Companies Not Created Equally

These structural changes have been a bastion of growth for the credit card industry over the last few years. But all credit card companies are not created equally, which brings us to the key point of this investment conversation, the difference between companies operating on a transaction basis and those that issue and subsidize consumer debt.

Transaction oriented credit card companies have held up much better than their debt issuing brethren and look well positioned to prosper on a long-term basis with strong earnings and assets. Here is a more detailed look at the fundamentals associated with each respective group of card companies.

Transaction Oriented

Mastercard Inc. (MA - Snapshot Report) does not issue debt, the company's revenue is derived on a transaction basis. This has been a feather in the companies hat as defaults continue to plague creditors. Mastercard's share price is down more than 50% over the last 9 months, but the good news is that estimates have stabilized, providing an opportunity to capture better value. Mastercard Snapshot Research Report.

Visa, Inc., (V - Snapshot Report) has also traded lower in the volatile market of the last 9 months, but the company's recent first-quarter performance was impressive, showing 35% earnings growth from last year. The next-year estimate is down a mere 10 cents in the last 3 months, pegged at $3.18 per share, an 18% earnings growth projection. Visa Snapshot Research Report.

Buyer Beware

American Express (AXP - Analyst Report) is in the process of shutting down unprofitable business segments that were designed to capitalize on the credit frenzy. This has not been a profitable long-term strategy for the company, hurting its stronger core results. Shares of AXP continue to head lower in the credit tumult, dropping from $52 to a recent range between $11 and $12. Estimates have fallen in tandem, with the current-year sliding to $1.04 per share from $2.23 just 90 days ago. American Express Snapshot Research Report.

Discover Financial Services (DFS - Snapshot Report) is projected to lose 3 cents per share in the current year, down from a gain of 93 cents just 90 days ago. This Zacks #4 rank stock produced a loss of 19 cents in the last quarter. Discover Snapshot Research Report.

Conclusion

On the surface, these companies look similar. But small differences do exist, and small differences can lead to big gains in a tough market. By knowing which companies are built to weather the storm, you can position your portfolio for robust gains and profit maximization.

Additional Resources

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