American Express Seeing Strong Spending Growth, And It's Reflected In The Share Price

 

American Express (AXP) may not be the best proxy for consumer spending, given that its card lending skews to prime and super-prime customers (as well as businesses), but it is nevertheless apparent that consumer spending is already starting to recover strongly in the wake of lifted pandemic restrictions. Second quarter results were largely driven by better provision, but there was still a core beat, as well as strong underlying volume numbers.

Up almost 80% over the last year, American Express has done quite a bit better than most of its banking peers (Bank of America (BAC), Citigroup (C), and JPMorgan (JPM), though not quite as well as fellow card specialist Discover (DFS), nor heavily card-driven Capital One (COF), with the latter two more leveraged to “mass market” customers. At this point I believe mid-single-digit long-term core earnings growth and returns on tangible common equity in the mid-to-high 30%’s can support a modestly higher share price, but the stock doesn’t look notably undervalued unless you have a more bullish outlook on consumer spending and spread margins.

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American Express Seeing Strong Spending Growth, And It's Reflected In The Share Price

JPMorgan Benefiting From Calm Credit, A Strong Competitive Position, And Potential Catalysts

Among the larger banks, JPMorgan's (NYSE:JPM) post-election performance has been on the higher side of average (up about 25%), but the shares have been a standout (along with Bank of America (NYSE:BAC)) over the past year as the bank has been leveraging its strong market share and competitive positions as it waits for rates and economic conditions to improve.

Credit quality has been good and likely can't get much better, but loan demand can improve if the economy grows from here and higher rates should drive better spreads. What's more, JPMorgan and the rest of its large bank peers could be in place to benefit from a less stringent regulatory environment and a lower tax rate. While the shares look priced for a high single-digit return absent a meaningful reduction in the bank's tax rate, a meaningful reduction of the tax rate could drive a fair value into mid-to-high $80's.

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JPMorgan Benefiting From Calm Credit, A Strong Competitive Position, And Potential Catalysts

Seeking Alpha: The Green Dot Roller Coaster Rolls On

Roller coasters are something of a Marmite proposition - you either love them or you hate them - and so too with roller coaster stocks like Green Dot (NYSE:GDOT). The basic concept of prepaid reloadable debit cards is a sound one and one that offers good access to the sizable unbanked/under-banked market, but I'm not sure that the company has the marketing and product power to withstand significant competition from the likes of American Express (NYSE:AXP) and Western Union (NYSE:WU).

The prospects of a contract renewal with Walmart (NYSE:WMT) could loom over this stock for most of the next year, and the unpredictability of the impact of the company's business development spending adds another variable to the mix. I believe the stock appears undervalued on even modest free cash flow growth assumptions, but investors have to ask themselves if they want to take on the elevated risks.

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The Green Dot Roller Coaster Rolls On

Seeking Alpha: Heartland Payment Offers Increasingly Diversified Growth

Not a lot has changed about Heartland Payments (NYSE:HPY) over the last eight months. When I last wrote about Heartland, I thought the company was a quality growth play on the increasingly cash-less transaction market and was pursuing some quality growth opportunities outside of merchant acquiring and payment processing. The problem then and now is valuation; I thought Heartland was well-valued in November and the market-lagging 1% appreciation since then doesn't change my view. While I like Heartland as a low-teens grower over the next decade, the valuation already seems to anticipate that.

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Heartland Payment Offers Increasingly Diversified Growth 

Seeking Alpha: After The Panic And Rally, Green Dot Still Has Plenty To Prove

Watching Green Dot (GDOT) from the cheap seats (ie, not as an actual shareholder) has been an interesting experience, as the market has moved through a pretty predictable cycle of excessive risk-blind optimism, near-blind panic, and relief. While that all has been going on, the market for prepaid debit cards has continued to develop and mature but still seems to be largely unpenetrated. At the same time, Green Dot has been rolling a range of services and distribution points that should give it a leg up in maintaining its position as the market leader.

At this point, I think Green Dot is in sight of fair value, but I'll be the first to acknowledge that there is a bigger than average range of potential outcomes here. I'm expecting Green Dot to generate mid-to-high single digit revenue and free cash flow growth, but the opportunity is larger than those numbers suggest and Green Dot could elbow out its competition. I could also see this company appealing to a range of companies in the payment foodchain, any one of which could use the fee income and customer base that Green Dot can offer.

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After The Panic And Rally, Green Dot Still Has Plenty To Prove

Investopedia: Waiting For A Better Price On Wright Express

Closed-loop systems can be licenses to print money, and Wright Express (NYSE:WXS) certainly has ample room left to grow in the trucking fleet service market. That said, the volatility of fuel prices, the actions of competitors and the inertia of potential customers are all challenges to the company's potential growth. While Wright Express would be a very interesting growth stock at the right price, today's valuation is not so compelling.

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Investopedia: How Much Better Can It Get At Discover?

By any reasonable measure, Discover Financial Services (NYSE:DFS) has come back strongly from the worst of the credit crunch - having broken $5 in the spring of 2009, this stock has very nearly reached $35 in the past couple of months. The company has certainly made progress getting more merchants and shoppers to use its cards and network, and it also seems to be picking up a little debit card share in the wake of new regulations. While these shares aren't overpriced, investors may want to ask themselves how much better they think a business can get before they buy shares.

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Seeking Alpha: Investors Fret As Visa Rolls On

I don't want to trivialize a Department of Justice investigation, nor the possibility that the government will force Visa (V) to modify its post-Durbin strategy, but I'll argue that the odds are good that whatever it takes to get this worked out will look like a rounding error in a couple year's time. Although there's a chance that the move toward mobile payment may shake up the business a bit, the sheer power of Visa's network and the realities of consumption-oriented economies argue for a lot of durable value in this company.

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Investors Fret As Visa Rolls On

Investopedia: Green Dot Flashing Yellow

I'm not exactly sure why, but specialty finance seems to have more than its share of flash-in-the-pan growth stocks that come out of nowhere, post a couple of years of great growth, and then all but disappear from the scene. The risk of a repeat performance seems to weigh on the shares of Green Dot (NYSE:GDOT), as many analysts project robust revenue and free cash flow growth, but seem to take a "no, you first" mentality to the stock.

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Investopedia: Green Dot Making Investors A Little Green

It's not uncommon for new stocks to give back a lot of their market cap as the initial public offering (IPO) buzz fades and initial buyers look to cash out. In the case of Green Dot (NYSE:GDOT), that readjustment period has been pretty difficult as the stock is off nearly 60% from its all-time high. Making matters worse, competition is heating up and management's decisions have left more than a few investors scratching their heads.

Not Quite Living up to all the Growth Hopes  
Green Dot has logged three straight quarters of below-consensus revenue, and that frankly weighs heavier with institutional investors than the fact that that revenue is growing at a better than 20% clip. Where Green Dot is earning some credit is with the margins, as the company did pretty well in the last quarter with a two point improvement in adjusted operating margin.

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Investopedia: Is eBay A Trap?

Years of working as an analyst and investing my own money has made me suspicious of any tech stock that seems to offer both growth and compelling value. More often than not, the growth evaporates and that apparent value becomes a value trap. When looking at eBay (Nasdaq:EBAY) it's worth wondering why the Street isn't bidding this one up higher - is there that much doubt about its ability to keep its hold in e-commerce or build PayPal into an even more substantial player in payment processing? (To know about the technology industry, read A Primer On Investing In The Tech Industry.)

Respectable Fourth Quarter Numbers...  
eBay did more or less what it was expected to in the fourth quarter and a little more. Consolidated revenue rose about 35% as reported and 19% on an organic basis. Revenue growth was led by the payments business, up almost 28%, while the marketplace segment saw revenue growth of 16%. GSI chipped in $364 million in revenue this quarter.

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Seeking Alpha: JPMorgan Chase Has Value But Little Momentum

There may be plenty of apparent values in the banking sector these days, but investors aren't biting. Take the case of JPMorgan Chase (NYSE: JPM) – most analysts seem happy enough to crown them as the best-run major bank in America, but that didn't keep the stock from losing about 20% of its value in 2011. At least part of the problem here is timing and the absence of any real near-term momentum. Although there are plenty of long-term factors in the bank's favor, the list of what could go wrong in the short term is a fair bit longer than the list of things that could go right.

Good Capital … Or Is It?

Unlike major rivals like Citigroup (NYSE: C) and Bank Of America (NYSE: BAC), JPMorgan has been lauded for how it managed its credit exposures through the crisis and recovery. In terms of metrics like Tier 1 capital, JPMorgan does look to be reasonably well off and credit losses have been improving apace.

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JPMorgan Chase Has Value But Little Momentum

Investopedia: Discover Still A Little Underappreciated

Discover Financial Services (NYSE:DFS) is really no longer the plucky up-and-comer. It's getting to the point where merchant acceptance of the Discover card is much more common than not, and the company is certainly a viable alternative to American Express (NYSE:AXP) when it comes to closed-loop systems. That said, the company still lags MasterCard (NYSE:MA) and Visa (NYSE:V) meaningfully, and investors have to balance out the potential benefits of future growth and M&A with the credit risks inherent to the business model.

A Solid End to the Year 

Discover's fiscal fourth quarter results ended the year on a relatively strong note. Revenue rose 13% as reported, with net revenue rising almost 23% from the year-ago level. Although the company's net interest income and margin was a little sluggish, that had a lot to do with student loans that the company acquired. Other metrics were pretty solid; receivables were up about 1%, credit card loans were up 3% and card sales volume was up 8% from last year.

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Investopedia: Will eBay's Numbers Match Its Business?

EBay (Nasdaq:EBAY) is a strange business in many respects. Along with Amazon (Nasdaq:AMZN), eBay has been out there almost since the beginning of the internet as a public phenomenon, and it has managed to avoid the malaise and irrelevance that has withered AOL (NYSE:AOL), Yahoo (Nasdaq:YHOO), and a host of businesses that have either taken low-ball bids or gone out of business altogether.


And yet, there are some oddities to eBay's numbers. Though eBay basically dominates online auctions and has built an impressive business out of PayPal, the company's returns on invested capital are not all that spectacular and the company's free cash flow margin has been in prolonged decline. The question, then, may not be so much about eBay's future growth prospects as it is about how much of that growth will ultimately benefit shareholders.

Satisfactory Third Quarter Results
All in all, eBay's third quarter report was fine. Reported revenue rose 32%, while organic revenue growth was more on the order of 18%. The company's marketplaces business saw revenue growth of 17%, while PayPal revenue grew 32% on a 14% increase in registered accounts and 31% increase in net payment volume.


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Investopedia: Can Capital One Get Real Value From ING Direct?

Capital One (NYSE:COF) has seemingly always been on the hunt for more loanable funds, and the company has taken a big swing with its acquisition of ING Groep's (NYSE:ING) ING Direct. While there is no question that this acquisition will give Capital One a much larger deposit base, it is not so obvious that the company will turn this into a value-additive deal. (For more on how this deal and others are valued, check out Analyzing An Acquisition Announcement.)


Terms of the Deal
Capital One agreed to pay $9 billion for ING's U.S. online banking operations, with $6.2 billion of that coming in the form of cash. With the remainder in stock, ING will be a major shareholder of Capital One. At close to 1 times tangible book value, it may not seem like Capital One is paying all that much, but investors should remember that ING was a highly motivated seller - divesting ING Direct was a requirement as part of the company's bailout.

What Capital One Is Getting
With this deal, Capital One adds about $80 billion in deposits to its franchise and returns to the mortgage business. While Capital One already had its own online bank, ING Direct is arguably the best-known operator of online savings accounts and may enjoy some brand value and distinction. Unfortunately for Capital One, the branch-free model at ING Direct is not quite as profitable as some might imagine and pre-provision earnings of $630 million is not a compelling return on capital. (To help you determine if this acquisition is going to be a success, read What Makes An M&A Deal Work?)

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Investopedia: Discover - A Cleaner Play On The Consumer Recovery

Sometimes it feels as though Congress and federal regulators are trying to bleed out major banks through dozens and dozens of regulatory papercuts. On top of that, there is still a lot of overheated rhetoric about the "evils" of large banks that hearken back to the populist movements of the late 19th century. That may all be an advantage for Discover Financial Services (NYSE:DFS), then, as this relatively purer play on credit cards may have fewer restraints on its day-to-day operations. 

A Solid Recovery Continues 

Like its banking cousins, Discover is continuing to benefit from a much-improved credit environment and that is funneling through to the bottom line. Growth was not necessarily all that impressive in its own right, though. Total revenue rose about 3% from last year (or about 4% sequentially), fueled by a 2% rise in net interest income (up 4% sequentially). Within that, card sales volume was up 7%, but credit card loans were down 3% while total loans rose on higher student loan numbers.

Credit was once again a good story. Write-offs dropped almost a full point sequentially and more than three points on a year-over-year basis. That fueled a lot of the outperformance this quarter, as the company reversed a year-ago loss and beat the average estimate by a wide margin.

Interestingly, fee income is going nowhere fast at Discover. That is interesting as Discover "under-fees" its customers relative to the likes of American Express (NYSE:AXP) or Capital One (NYSE:COF), and this would seem to be an opportunity for growth in the future. On the other hand, with regulators looking to hammer the fee income of companies ranging from AmEx to Mastercard (NYSE:MA) to US Bancorp (NYSE:USB) to Visa (NYSE:V), maybe Discover's low fee revenue is a point of positive differentiation.

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Looks Like Another Good Quarter For Portfolio Recovery

I have to confess that I've been thinking a lot lately about selling Portfolio Recovery Associates (Nasdaq: PRAA), booking my gains, and moving on to a new idea. But here again I'm conflicted – I do not like selling the stocks of very well-run companies just because they get a little expensive. So, I hold on … and today's earnings report makes me feel a little better about it.

Solid Earnings

PRA reported that revenue jumped 38% in the fourth quarter, reaching just under $101 million. EPS jumped 50% to 1.20. That compares very favorably to the average estimates of $97 million and $1.12 and the high-end estimates of $99 million and $1.16.

Looking at the details, Portfolio Recovery reported a 52% increase in cash collections (to $144 million) and maintained the same amortization rate as in the year-ago quarter. Call center collections, the company's core business, was the laggard if 19% growth is “lagging”. External legal collections rose 38%, while the company's efforts to grow its internal legal collections paid off in 70% growth (though a still-small absolute level of collections at $13 million). Purchased bankruptcy collections were up 110% to $56 million; most interesting to me because this is the first time something has been a larger contributor than internal call center collections.

Productivity was also better – collector productivity per hour paid rose 2% from the third quarter to $204 per hour paid. All in all, operating expenses rose 26% with a big jump in spending on internal legal – a business that has quite a bit of promise, but is still something of a drag on margins.

Paying Less But Getting More?

The company was also once again quite active buying paper. In this quarter, Portfolio Recovery bought written-off paper with a face value of $1.87 billion, paying a bit under $86 million for it. Although paper prices have been moving up as credit quality and household finances improve, PRAA paid $0.045 on the dollar – down from $0.067 in the third quarter (when the company paid $92.5 million for $1.38 billion in face value). Of course some worry that PRA bought lower-quality paper, but Portfolio Recovery has a long history of realizing value from its paper – even if the company's projections for its 2010 purchases are a 210% return (versus the long-term average of 243%).

Better Times On The Way

All in all, it looks like things are getting better in this market. JPMorgan (NYSE: JPM), Citigroup (NYSE: C), Bank of America (NYSE: BAC) and American Express (NYSE: AXP) all seem to be reporting better charge-off data on credit cards. Moreover, it doesn't look like the job situation is getting any worse in the country – an important consideration as Portfolio Recovery really cannot collect if people don't have jobs. That said, this is always something of a mixed blessing – it ups the odds that PRA will enjoy good collections, but it has always brought more competition back into the market and bid up the price of paper.

The Bottom Line

As the economy improves, I think Portfolio Recovery will see a lot of earnings leverage. After all, contrary to a lot of the stereotypes, a lot of the people who default on debt actually do want to make good … and once they get the economic wherewithal to do so, they do. Moreover, even though the market for paper is largely an auction market where the high bid wins, PRA's long standing in this market does serve it well when dealing with sellers. Moreover, there is something to be said for know-how and employee relations in this business and PRA knows how to find, train, and retain good collectors.

So, what's the stock worth? This is a trickier type of stock relative to a healthcare company or industrial. Nevertheless, even very modest projections of mid-single-digit free cash flow growth for the next decade and a relatively high discount rate of 12% are sufficient to power a price target in the $90's. I'm happy to hold PRA shares for the time being.

I would HOLD shares of Portfolio Recovery Associates.
   Note - I mistakenly wrote that I would "Buy" PRAA at these levels in my initial post. With an expected return of about 20% from these levels, that doesn't meet my "Buy" standard. 

Disclosure: I own shares of Portfolio Recovery Associates and JPMorgan

Quick Thoughts On JPMorgan Earnings

All in all, JPMorgan (NYSE: JPM) reported pretty decent earnings this morning. The company beat the consensus number by $0.12, with about $0.06 of that coming from actual better-than-expected operating performance.

Net interest income was down about 3% sequentially (not so good), but investment banking was pretty strong (positive). The company also had a lot of shuffling of reserves - adding $2.1B in reserves to WaMu's credit book, adding $1.5B to litigation reserves, releasing $2B in reserves tied to credit cards, releasing $1.2B in reserves tied to the bank's core mortgage portfolio (its own mortgages, not WaMu's), and recognizing $1.2B in securities gains.

Non-performing assets were down 6% on a sequential basis (though still quite high at $16.6B), while consumer NPLs were down about 10% (and wholesale were up 6%).

So, bottom line(s):

- A good quarter, but not a blow-out

- Cards continue to recover nicely, and that should be good news for Citi (NYSE: C), Bank of America (NYSE: BAC), US Bancorp (NYSE: USB), American Express (NYSE: AXP), and Capital One (NYSE: COF). Interestingly, but not surprisingly, debtors are making sure they take care of their credit card bills, even while they default on their mortgage (after all, you can't spend a house, right?).

- Lower net interest income and higher losses/charge-offs in commercial real estate are bad news for regional banks. It wouldn't surprise me to see a little concern regarding banks like Comerica (NYSE: CMA), BB&T (NYSE: BBT), Zions (Nasdaq: ZION), Westamerica (Nasdaq: WABC) and so on.

- Loan growth is coming back and losses are getting better. The GSE put-back issue may be close to over (if the Bank of America deal is any indication), and there seems to be increasing clarity on the foreclosure litigation front.

- JPMorgan is moving on to the next phase and figuring out what to do with its capital. I would like to see them get more active internationally, but time will tell if Dimon agrees with me.

I would BUY JPMorgan shares today.

Disclosure: I own shares of JPMorgan and BB&T. 

Feds Nickel And Dime The System

Apparently the federal government is not finished trying to tinker with bank and finance laws in the hopes of creating a consumer paradise. Unfortunately, the laws of unintended consequences are still in effect, and changes to interchange fees could create a lot of turbulence in the business of processing the millions of debit card transactions that occur every year.

The New Rules
Although nothing is final yet, on Thursday the Federal Reserve proposed significant changes to the debit card processing business. The most important part of the potential new rules concerns the interchange fees that banks receive every time a card is swiped. While transaction fees had been averaging about $0.44, or about 1.1% of the transaction value, the new rule would cap the fee at $0.12 per transaction. Clearly that is a major cut in a line of revenue that had been virtually pure profit for the banking industry. (For related reading, see Watch Out For Changes In Credit Card Agreements.)

Shoot First, Ask Questions Later
While there were expectations that limits of some sort were in the offing, investors were taken aback by the scale of the cut and blasted Visa (NYSE:V) and Mastercard (NYSE:MA), the two largest card network operators. Although these fees are not part of the companies' revenue (even though they set them), investors seem to be making the assumption that banks will push back hard on these networks and demand some sort of concessions in the fees they have to pay to help make up the difference. Apart from the fees, there is also a risk that new rules will come into play that will promote and increase competition in the network space and that could be a direct problem for these companies. 


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Discover Shows A Better Credit Environment

Whether or not the recent news that recession "officially" ended a year ago has any meaning or not, it is hard to argue that improving consumer credit trends are not a positive for the economy. When reviewing Discover Financial Services' (NYSE:DFS) August quarter earnings announcement, there are definitely some encouraging signs of improvement.

The Quarter that Was
The number four credit card company - behind Mastercard (NYSE:MA), Visa (NYSE:V) and American Express (NYSE:AXP) - Discover, announced a solid earnings beat for its fiscal third quarter. Earnings were up 73% for the period, handily beating the consensus estimate. Transaction volume increased about 7% in the quarter, an interesting metric for both consumer spending and the company's relative market share. 


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