It's been quite some time, but it's safe to say credit is back. The shift to debit cards as the Great Recession hit full force didn't quite decimate the credit industry, but it certainly knocked it for a loop. As did the rise in defaults and the subsequent tightening of credit requirements.
Now with several factors working in the industry's favor, it's time to take a good hard look at credit card issuers again. The options are many and most all of them are good, but value investors in particular will recognize that one stands above the rest.
By now you've heard about the push from banks for credit card usage after the limitations imposed on debit card fees, and that has certainly helped prop up the once downtrodden industry. There's also a slowly growing notion from consumers that things are looking a bit better economically. Consumer spending is on the rise, the Holiday shopping season was generally positive and the numbers relating to the use of credit, a good indicator of consumer sentiment, would seem to bear this out.
In addition to a solid Holiday shopping season, the trends reported by the credit card industry for 2011 provide support to the empirical evidence. In the first quarter of this year, credit card usage jumped 8.2%; pretty strong to say the least. The second quarter of '11 saw a 9% surge in usage. And finally, numbers for Q3 were even better; to the tune of a 10.6% increase in credit card transactions. It's likely the announcement of Q4 figures will continue this trend.
Of all the major players, the cheapest of the credit card bunch remains Discover Financial (DFS). Though not the only option for investors, it DFS does offer the greatest upside. Both Visa (V) and Mastercard (MA). continue to perform, but they are also the most expensive of the bunch. Even American Express (AXP), trading at a mere 11.99 times earnings is priced twice as high as Discover's P/E of only 5.96.
With over $4 a share in earnings, Discover's last quarter should not be overly concerning. Though assets grew, the quarter-over-quarter decline in net income scared investors into over selling DFS. As so often happens, this made a good investment opportunity even better. With every uptick in consumer confidence, the credit card industry stands to benefit. And with valuations being what they are, Discover will benefit the most.