Paradigm Shift For Plastic?

By Greg Sushinsky | September 14, 2010 AAA

With the changes in the regulations for credit and debit card issuers working their way through the system, along with changes in the ways consumers are using their cards, some industry observers are predicting more looming troubles for the credit card industry.

IN PICTURES: 6 Major Credit Card Mistakes

Recession, Regulation and Change
A recent Barron's piece cited an analyst's downgrade for Visa (NYSE:V) and Mastercard (NYSE:MA) stocks due to impending changes from financial reform legislation. The potential development blunting the ability of the card issuers to raise prices on their debit card fees was cited. This would impact results likely in the next year. Changes in consumer preference in the use of debit cards over credit cards was noted for the first time in 2009. Total payment volume at Visa in 2009 was $883 billion for debit cards and $764 billion for credit cards. The recession has had its effect on consumers' usage habits, as they have shown a trend of becoming more cautious and conservative in their credit card use. (To learn more, see Expert Tips For Cutting Credit Card Debt.)

Card Stocks Hammered
Visa and Mastercard stocks have been squashed by the fears of the effects the new regulations, and usage patterns may eventually have on their bottom line. Visa stock recently traded at just over $65 a share, sitting at a new 52-week low. Mastercard traded similarly, at $192 a share, slightly up from its 52-week low. American Express (NYSE:AXP) stock, on the other hand, traded in its 52-week mid-range, at around $41 a share, as there is some industry feeling that, as the premium brand for card interchange, there will be less negative impact on its long-term earnings growth.

Doom Overdone?
The most negative scenarios on the card industry see the changes already wrought as the first in a series of profit-chopping effects on the card companies.Yet investors have to wonder if some of this speculation of vast future troubles isn't overdone. The credit card industry remains a profitable place for card companies. Discover Financial Services (NYSE:DFS) has gradually been improving its earnings picture, and is expected to continue that trend in the next couple of years. Capital One Financial (NYSE:COF) has had dramatically improved earnings results this year, and actually looks strong going forward. While changes in the structure of the industry have and will affect profits, prior to the recession, card companies were doing exceedingly well.

The Bottom Line
Of particular note would be Visa and Mastercard, which have stocks that scraped their 52-week lows. Even with the new landscape regarding the card world, it's noteworthy that Visa earnings are expected to grow 21% in 2011, while Mastercard is expected to tack on a 19% profit increase. Certainly the changes in the card habits of consumers are significant and bear watching; financial companies turned sour during the recession, so any macroeconomic bumps are also a concern. That said, the card habit, debit or credit, is too powerfully ingrained in North American and European culture, indeed usage is the norm for transactions. The card industry has been spreading out globally for years, so the habit should find new users. These stocks right now may represent an oversold opportunity for investors who don't buy into the picture of total doom for the future of the credit card industry.

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