Tickers in this Article: AXP, DFS, V, MA, COF
Remember January of 2009? We now know it was the dark before dawn, but at the time, consumers were financially drowning. Late payments on credit card bills had reached record levels, and defaults were close to all-time highs.

All the credit card issuers were feeling the pinch too, but subprime card issuers like Capital One Financial (NYSE:COF), which had just come off its worst quarter ever, losing $3.74 per share, weren't reaping any benefits. Around the same time, Discover Financial Services (NYSE:DFS) was about to post one of its worst-ever quarterly numbers as well, largely stemming from a $481 million bad-loan charge-off. That's not something a company that generated $1.7 billion in revenue that quarter could really afford to do. Then again, there was no real choice.

Tutorial: What To Know About Credit Cards

Even a rebound in loan quality wouldn't be a full recovery though, as consumers - largely fed up with the mental burden and poor service from credit card companies - started a fairly effective (even if impromptu) underground movement to rid themselves of credit cards forever.

The salt would be poured into credit card issuers' wounds a few weeks later.

By May of 2009, President Obama's Credit Card Reform Act was passed, crimping banks' and credit card companies' credit-based profits. That's probably why the American Bankers Association was one of the bill's most adamant opponents. There was just too much profit at stake to let the old ways of generating revenue slip away. The bill passed anyway though, and went into effect by early 2010.

The End of an Industry?
Fast forward to today. How bad have the issuers and middle-men been hurt? Visa (NYSE:V) recently posted record revenue and record profits for 2010, earning $4.01 per share last year. The same goes for MasterCard (NYSE:MA).


Although Discover Financial and Capital One Financial didn't resist the recession's effects and stave off losses, both of them are now on pace for huge income in 2011. For Discover, analysts are looking for earnings of $2.69 per share, which would be a company best. For Capital One, the expected earnings of $6.66 per share would be just a little shy of 2006's peak EPS of $7.67.

In all four cases, the growth trend is clear and intact.

Things looked truly grim for credit card issuers for a while, but as it turns out consumers didn't cut up all their cards after all. Plus, it looks like banks have found new ways to extract even more fees, despite the challenges of new legislation. More than anything, though, it looks like many credit card issuers are investment-worthy again - especially the direct issuers/providers like Discover, Capital One and American Express (NYSE:AXP) (as opposed to payment network companies like Visa and MasterCard, which aren't exactly a perfect comparison).

Discover shares are currently trading at 11 times trailing earnings and 10 times forward-looking earnings. Capital One's trailing P/E is almost comical at 8.1; the projected one of 9.6 is just as attractive. American Express is trading at 12.3 times its future earnings projection of $3.81 for 2011, after only earnings $1.54 per share in 2009.

The Bottom Line
So how did these companies make a 180 degree turnaround in two years, when they were struggling just to survive? The difference between a good stock opportunity and a great one is usually just the difference between giving consumers what they need - like food - or giving them what they want, like an ego stroke, gratification, or a proverbial toy. Most people don't "need" to use a credit card to spend more than they earn, but many people do it anyway to buy the things they want.

Nobody "needs" a credit card , but many people certainly want one. There's no sense in credit card companies passing up this opportunity, and the same goes for investors.

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