Life in Plastic -- It's Fantastic!

I'm no Barbie girl, nor am I living in a material world, but that didn't stop Discover Financial Services (NYSE: DFS  ) from following the footsteps of the entire credit services sector and blowing away Wall Street's estimates last night.

Life in plastic -- it's fantastic!
For those of you who thought Discover was the weakest link, think again. Discover reported a 36% jump in first-quarter profits to $1.18 from just $0.84 in the year-ago period. Although net revenue met the Street's consensus figure, Discover's $1.18 per share in profit crushed the $0.94 analysts had been looking for.

These results were fueled by positive aspects all across the board. Credit card usage increased 7%, while delinquencies hit an all-time low. The drop in delinquencies has prevented Discover from needing to set aside as much in loss reserves, which provided the huge boost to its bottom-line profits. Total loss reserves dropped 64% year over year.

And when I say all aspects of its business were strong, I really mean all aspects. The company's student loan division saw double-digit organic growth while personal loans also saw solid growth. Discover ended the year with $56.3 billion in loans, up 9% from the prior year.

I literally couldn't find one thing in this report to nitpick (and for those of you who have become familiar with me over the years, you know I'm a huge nitpicker), which goes to show just how unstoppable the credit services stocks are at the moment.

It's a party, and everyone's invited
In February, Visa (NYSE: V  ) reported a 16% jump in profits that easily soared past Wall Street's estimates on the heels of international card use strength. MasterCard (NYSE: MA  ) crushed Discover's already bullish figures by reporting a 23% jump in transactions processed in early February. The company also doubled its quarterly dividend.

Prepaid debit card providers are getting in on the act as well. NetSpend Holdings (Nasdaq: NTSP  ) reported a direct deposit jump of 20% last month, with gross dollar volume rising by $300 million to $2.8 billion. Even American Express (NYSE: AXP  ) caved in to the peer pressure last year by offering a prepaid debit card. The market for prepaid cards grew from $48 billion in 2009 to $65 billion in 2010, so it appears to be a smart move.

Foolish roundup
I truly refrain from saying that an industry is infallible, but the credit services sector looks like it might be the strongest sector in the market (Apple stockholders, please find it in your hearts to forgive me). The move toward plastic has been so strong and swift, and the rise in credit quality among its customers so pronounced, that I see no reason why Discover or these other four credit service companies wouldn't be considered a long-term buy at these levels.

Disagree with my overwhelming credit services bullishness? Tell me and your fellow Fools about it in the comments section below and consider adding these five companies to your free and personalized watchlist.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He would be lost without his rewards card. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of MasterCard and Apple. Motley Fool newsletter services have recommended buying shares of Visa and Apple, as well as creating a bull call spread in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always of interest without charging interest.


Read/Post Comments (1) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 23, 2012, at 9:54 AM, golfergman wrote:

    Nice article and summary, thanks.

    NTSP announced major partnerships with 7-11, BET, Blackhawk, and Paypal last year. The impact of those deals on revenues will in theory start to be felt in 2012, so there is a good chance of accelerated business growth there.

    GDOT is heavily dependent on Wal-Mart, who own a small percentage (5%?). However, Wal-Mart recently also added AmEx pre-paid debit cards to their prepaid lineup. I guess we will see whether GDOT or AmEx is the better marketer going fwd, but this has to be a very uncomfortable situation for GDOT.

    Of the three, I think NTSP is likely to perform best in this space, for a whole variety of reasons, not least of which is their highly diverse sales channels.

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