Banking & Finance

Merrill Lynch Very Bullish on Credit Card Stocks as Growth Surges

One thing that often gives economists more confidence in growth in the economy is higher credit card use by consumers. After the great recession of 2009, consumers went into hibernation and the use of consumer loans came to a virtual standstill. Finally, after years of deleveraging, the consumers are starting to use their cards again, and that could be a huge plus for the top credit card companies.

A new research report from the consumer/commercial financial services team at Merrill Lynch suggests that a potential inflection point for the credit card issuers is at hand, and the analysts think it could drive and extend a positive earnings cycle for the top stocks in their coverage universe. With credit levels still at historic lows, and earnings growth just gaining traction, there may be some tremendous upside for investors.

Merrill Lynch has handily raised their price targets on three top credit card stocks that are rated Buy at the firm.

American Express Co. (NYSE: AXP) is the quintessential high-quality company, particularly compared to many of its financial sector peers. With strong market shares in its core markets, growth is underpinned by an improving macro environment, new initiatives such as prepaid cards and expansion of its network business and significant share buybacks. Investors are paid a 1.1% dividend. Merrill Lynch raises its price target on the venerable financial name to $105 from $94. Thomson/First Call price target for the stock is $97.10. American Express closed Wednesday at $94.47.

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Capital One Financial Corp. (NYSE: COF) offers a broad spectrum of financial products and services to consumers, small businesses and commercial clients through a variety of channels. With more than 900 branches around the United States, the company has more than $206.9 billion in assets. The Merrill Lynch analysts are very positive on the name as they think the company is well positioned to see growth with consumers with smaller revolving balances. Capital One is one of the few credit card companies that still focuses on this segment, and their zany commercials are aimed right at that demographic. Investors are paid a 1.4% dividend. The Merrill Lynch price target goes to $94 from $84, and the consensus is set at $88.42. Shares closed Wednesday at $84.38.

Discover Financial Services (NYSE: DFS) is a third top pick for investors from Merrill Lynch, and it may have some outstanding earnings on tap next week when they report second-quarter numbers. The analysts also think that the company will record higher second half growth, even above its current expectations. They are now forecasting 6% credit card growth for 2014 and higher full-year expected earnings. A continued strong share repurchase program is also expected. Investors are paid a 1.5% dividend. Merrill Lynch has a $73 price target, which is up from $63. The consensus target is $67.48. Discover closed Wednesday at $64.02

The Merrill Lynch investment thesis is very solid here. With the credit card freeze just starting to thaw, these top stocks to buy could have much more room to run than some of their financial services counterparts. Long-term investors looking to add solid growth to their portfolios may want to consider any of these leading names.

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