By Teresa Rivas
Guggenheim has an overview of the monetary sector today, encouraging investors to select carefully among card issuers, however highlighting other pockets of potential amongst huge banks.
Expert Eric Wasserstrom and his team compose that they are getting more careful on basic purpose card issuers, particularly Capital One (COF) and Discover Financial Services (DFS) offered the absence of net earnings growth in their 2016 and 2017 forecasts. Wasserstrom also sees additional threat if rate expectations aren’t satisfied in the 4th quarter.
From the note:
While the credit card space has actually been characterized by strong levels of asset growth, we are more cautious on the basic purpose card issuers, mostly due to the fact that this possession development is not leading to net earningsearnings development expansion. Particularly, the combination of rising marketing and rewards costs, which reflect the extreme competitive environment, and higher provisioning cost associated with profile growth are consuming the incremental earnings created by the asset growth. Even more, higher rate of interest normally enhance financing expenses, constraining margin growth. As a result, we are anticipating net earnings growth for 2016E-17E for COF of 0 %/ 2 %, and for DFS of -1 %/ -2 %. Hence, all of the EPS growth we forecast for these names over the next 2 years comes from share repurchases, a dynamic we believeour team believe will limit numerous expansion for these stocks. These factors likewise contrast with our more robust outlook for SYF and affirm our preference for this name in the card space
Nevertheless, Wasserstrom is more upbeat about other monetary names that don’t count on enhancements in the macro economy to grow their earnings per share.
He rates Goldman Sachs (GS) a Buy and calls it his Finest Concept, as its levered to the improving business M&A cycle. He also likes strong possession and volume generators Synchrony Financial (SYF), MasterCard (MA), Visa (V), and Wells Fargo (WFC).
Synchrony Financial is down 0.3 % in current trading, and Goldman Sachs is 0.4 % lower. MasterCard and Visa are up 1 %. Wells Fargo is up 0.1 %. Capital One and Discover are both 0.5 % lower.