American Express (AXP -0.84%) is up 48.7% year-to-date, Capital One Financial (COF -1.95%) is up 23.3%, Master Card (MA -0.08%) a whopping 54.3%, Visa (V 0.05%) 34.5%, and Discover Financial Services (DFS -2.60%) (DFS -2.60%) 38%. With the exception of Capital One, all of these companies are outperforming the S&P 500 in 2013, which is up about 26.5%. The short answer to the question asked in the headline: all of them.
The S&P 500 is currently priced about 19 times earnings, and currently the average P/E ratio of the entire credit-services sector is about 18.2. Visa, Master Card, and American Express currently trade around 27x, 30x, and 20x earnings, respectively. Capital One and Discover trade between 10-11x earnings, and they both deliver a dividend yield of roughly 1.5% while their peers offer yields between 0.30-1.1%.
American Express has been a top performer this year, second only to Master Card in year-to-date stock performance. This is despite having the lowest four-year-average profit margins among its peers, along with steadily slowing revenue growth. Many investors think this stock is a good buy because it still has room to grow and could perhaps catch up to the higher valuations of its peers. American Express is priced at 20x earnings, which is right in the middle among its competition.
Capital One Financial has underperformed both the S&P 500 and its peers. While the company's profit margins are on the lower end with those of American Express (roughly 12.5% on average), revenue growth picked up in 2012. In 2013, however, revenue is expected to come in at or slightly below 2012 revenue. Capital One is tied with Master Card on having the lowest beta in the group and offers a nearly 1.7% dividend yield -- the highest among the tickers mentioned here. I think this stock deserves a close look from investors considering how cheap it looks on paper. But sometimes, like with other things in life, you get what you pay for.
Visa is currently one spot ahead of Capital One on year-to-date performance. The company's four-year-average profit margin is nearly 35%, the highest among these five companies. It has a higher P/E ratio than most competitors, but Visa is well liked by investors and carries strong brand-name recognition. If you want this stock in your portfolio but are concerned it may be overpriced, I would encourage you to look at one of the many financial services index funds that are available. Visa can be found among the top 10 holdings of most financial services ETFs.
Discover Financial Services is performing just slightly better than Visa this year. The company pays a 1.5% dividend and is currently priced at just 11x earnings. But Visa and Discover's models are a little different. Like Master Card, Visa only processes payments to merchants and charges a fee for this service. There is no risk of default on lending money, and this creates less risk for Visa and Master Card. Discover, on the other hand, actually provides a line of credit to customers. This creates the opportunity to profit from interest, but it also adds the risk of default on those loans. When selecting which of these stocks to invest in, consider the differences in these models and the potential risk/reward in your analysis.
I saved Master Card for last since it's the current top performer in regard to year-to-date stock-price appreciation in 2013. The company's average-four-year profit margin is just a few basis points behind Visa's, but it's still impressive at 32%. In September, Master Card reported quarterly revenue of $2.22 billion, which is 15.6% higher than the same period a year prior. Additionally, the company has the strongest balance sheet among its peers. Master Card's cash reserves are increasingly steady year over year and the company remains virtually debt free. Because of these things, Master Card is most ready for aggressive investment, expansion, and acquisition. While the company's stock price is certainly not the cheapest, there is clearly good reason for the bullish price action seen in recent years.
To wrap it up, credit-services stocks have been among the top performers this year. If you owned any of these stocks near the beginning of 2013, you have probably been very pleased with this year's returns. Capital One and Discover Financial Services are both trading at relatively cheap prices right now, but when you compare everyone's financial statements there are some subtle indicators as to why this is the case. Don't let that shy you away from considering a position in one of these cheaper names, though. As the global economy continues to emerge from the recession, all of these companies will stand to prosper and provide strong risk-adjusted returns overall.
