Sector Snap: Credit card companies mixed

NEW YORK - Shares of credit card companies traded mixed Friday, as a handful of analysts expressed concern over the potential impact of a prolonged economic slump on the sector.

Fox-Pitt Kelton analyst Howard Shapiro cut his estimates on American Express Co., Capital One Financial Corp. and Discover Financial Services to account for a steeper economic downturn than previously expected.

He lowered his fourth-quarter estimate on Discover to 11 cents from 13 cents per share, and his 2009 estimate to 72 cents from $1.10 per share. Analysts surveyed by Thomson Reuters, on average, forecast fourth-quarter earnings of 16 cents per share and 2009 earnings of $1.01 per share.

At American Express, Shapiro forecast a profit of $2.80 per share in 2009, down from a prior estimate of $3.21 per share. Analysts are expecting net income of $2.32 per share, on average.

Shapiro also cut his 2009 estimate on Capital One to $3.28 from $3.54 per share. But this estimate does not incorporate the recently announced acquisition of Chevy Chase Bank.

The McLean, Va.-based Capital One said Thursday it will buy Chevy Chase Bank for $520 million in cash and stock, expanding its presence in Maryland, Virginia and Washington, D.C.

Capital One said the Chevy Chase deal will boost operating earnings in 2009. Capital One added that it expects to incur about $225 million of charges tied to acquisition and integration costs. It expects the deal to eventually reduce expenses by $125 million.

Friedman, Billings, Ramsey & Co. analyst Scott Valentin also cut his estimates on Capital One. He now expects earnings of $2.30 per share in 2009, down from $3.25 per share.

"In the long run, the acquisition benefits Capital One by providing a strong footprint in a fairly resilient market with attractive demographics," Valentin wrote. But, "we are less enthused given our outlook for increasing credit losses at Capital One and the need to husband capital in this environment."

Valentin maintained an "Underperform" rating on the shares and cut his 12-month target price on the stock by $10 to $25.

Capital One shares fell 89 cents, or 2.9 percent, to $30.10.

American Express slipped 34 cents to $20.50, while Discover dipped 4 cents to $9.98.

Meanwhile, James Kissane, a Banc of America Securities analyst, initiated coverage of both Visa Inc. and MasterCard Inc. with a "Neutral" rating.

Both companies' bank customers are consolidating at a rapid pace, Kissane said, and both have a significant concentration of business in just a few clients. "Over time, we have found consolidation and client concentration to work against third-party processors," Kissane said.

MasterCard and Visa differ from other credit card companies like American Express and Discover because they don't actually lend credit. Instead, they make money from processing transactions for their bank clients.

Analysts generally believe this makes them less vulnerable to a prolonged economic slump. Still, they are likely to feel some pain from a pullback in consumer spending.

"Shorter consumer spending and cross-border travel may inhibit growth in the short run," Kissane wrote in his notes to clients Friday. Visa's strong position in the debit card market should serve as a buffer to a weak economy, as debit usage will likely hold up better than credit usage, Kissane added. But MasterCard is less well positioned in the debit market, he said.

Visa shares rose 23 cents to $51.04 in afternoon trading. MasterCard added $1.52 to $134.79.

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