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Credit Card Stocks Worth Paying For

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Visa's strong outlook bodes well for the sector.

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An analyst's upgrade of Visa (V) signals optimism that the recession is ending and consumers will soon spend again.

David Koning, an analyst at Robert W. Baird & Co., raised his rating on the stock to Outperform from Neutral and boosted the price target to $100 from $88 a share.

"We expect reaccelerating growth over the next couple quarters, along with annual earnings-per share growth of more than 20% over the next couple years, and expect both to drive strong stock performance over the next year," Koning said in a research note.

On Friday, Standard & Poor's (MHP) said it will add Visa to the S&P 500 Index after the market close on Friday, December 18, replacing telecommunications and network equipment maker Ciena (CIEN). See also, Say "See You Later" to Ciena.

"We see a pickup in payment volume helping Visa achieve double-digit revenue growth in fiscal year 2010," Standard & Poor's says in a research report. "We also think that a rising trend toward non-cash payments, and strong growth prospects for credit cards in emerging market countries will help it withstand a weak global economy…(The company's) ability to curtail expense growth should also help boost earnings."

S&P expects revenue to increase 11% in fiscal year 2010 and set a 12-month price target of $88 a share. In early afternoon trading Monday, Visa gained $2.65, or 3.26%, to $83.99 a share, a new 52-week high.

Of course, there's a downside for the credit card industry. Unemployment is 10% and will likely remain high at least through the first half of 2010. The conventional wisdom says this is likely to dampen consumer spending and therefore depress the sector's earnings.

But the US Department of Commerce's Bureau of Economic Analysis says disposable income, or income after taxes available to be spent or saved, increased 0.4% in October compared with a 0.2% rise in September. Personal consumption rose 0.7% in October after falling 0.6% in September. Personal savings as a percentage of disposable income totaled 3.3% in October, compared with 4.6% in September, and 6.4% in May.

These figures suggest consumers are again opening their wallets -- and that's good news for credit card companies, including Visa, MasterCard (MA), American Express (AXP), and Discover Financial Services (DFS).

Visa has the largest credit card network based on the number of credit and debit cards in circulation, transactions, and total volume. It's also protected because it doesn't extend credit to its customers. Instead it relies on member banks such as Wells Fargo (WFC), Bank of America (BAC) or Capital One Financial (COF) to take the risk.

Visa says the number of cards carrying its brand rose 5% worldwide this fiscal year to 1.7 billion and reported strong fourth-quarter earnings in a downbeat economy.

The outlook for Visa's competitors is improving. FBR Capital Markets rates Discover Financial Services Otperform and set a price target of $19.

"Given the better-than-expected credit performance, we would expect The Street's estimates to increase, leading to share price appreciation," Scott Valentin, an analyst at FBR Capital Markets, says in a research report.
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No positions in stocks mentioned.
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