It’s been a rough go this year for financial stocks, with the S&P Financials Select Sector index falling 20%.
When it comes to credit-card issuers and card networks, Wells Fargo analysts anticipate some speed bumps ahead.
“We see risk of another leg down in the broader equity markets and continue to tweak down our economic-growth expectations,” they wrote in a commentary.
“However, we are still more worried about asset values than U.S. consumer health. We don't know if GDP growth will be negative for a period of time, but we figure zero growth in 2023 is a good base case.”
To be sure, card networks can “grind higher,” the analysts said. “We see the continued recovery of global travel as a driver of positive earnings revisions for the networks, or at worst a powerful cushion in a recession.”
Strong Card Spending
Total card spending “has remained strong, and recent global travel trends have been encouraging as global borders reopen,” the analysts said.
The biggest risks for the card networks in their second-quarter earnings reports are the dollar’s strength and covid, they said. But they think investors will view the dollar’s impact as old news.
As for card issuers, “consumer fundamentals remain strong today,” the analysts said. “But investors are worried about tomorrow, not today, which in a way makes second-quarter results somewhat meaningless.”
The analysts’ base case is that “the stocks pop a bit on good second-quarter results, then quickly fade, as investors refocus on macro [conditions].”
So what are the analysts’ favorite stocks?
“Our highest short-term conviction is networks Mastercard (MA) and Visa (V) on improving cross border travel, though dollar strength is a risk,” they said.
“For the issuers, American Express (AXP) remains our favored stock, and is our top pick, despite investor worries around the wealth effect.”
The analysts have a price target of $400 for Mastercard, compared with a recent quote of $327. For Visa, it’s a target of $255, compared to a recent quote of $206. And for Amex, it’s a target of $190 versus a recent quote of $137.
Morningstar’s Take on Mastercard
“We think a wide moat surrounds [its] business and view Mastercard’s position in the current global electronic payment infrastructure as essentially unassailable,” wrote Morningstar analyst Brett Horn.
Morningstar’s Take on Visa
“Visa is a somewhat unique company in that it is a longtime, established market leader that still enjoys strong growth prospects,” Horn said.
Morningstar’s Take on American Express
“The company’s greatest strength remains its existing cardholder base of high-spending individuals and small businesses,” wrote Morningstar analyst Michael Miller.
