JPMorgan More Bullish On Credit Cards Ahead Of Q3 Earnings

JPMorgan is turning upbeat on the credit card sector after year-to-date outperformance exceeded its outlook. 

The Analyst

• Analyst Richard Shane upgraded Discover Financial Services DFS from Neutral to Overweight and increased the price target from $81 to $89.
• The analyst maintained an Overweight rating on Capital One Financial Corp. COF and hiked the price target from $109 to $113.
• Shane maintained a Neutral rating on American Express Company AXP and lifted the price target from $105 to $115.
• The analyst maintained his Overweight rating on Synchrony Financial SYF and reduced the price target from $39 to $35.

The Thesis

Credit card fundamentals have outrun expectations and multiples have compressed, creating a more attractive investment opportunity, Shane said in a Tuesday note. (See his track record here.)

The credit card group looks good entering the third-quarter reporting season amid a slowing int he normalization of credit and a declining rate of delinquencies and net charge-offs, the analyst said. 

Shane said he expects DQs and NCOs to stabilize into 2019.

"Given compressed multiples ... we see the potential for positive credit commentary as a near-term catalyst," he said. 

JPMorgan named Capital One as its favorite card name through Dec. 19, as its improvement in credit metrics is likely to continue into 2019 with a substantial tightening in organic growth, Shane said. 

Discover Financial is on track for a soft landing amid a stabilization in loan growth, he said. This is due to industrywide moderation as well as a "more muted impact from growth math" at the company, the analyst said. 

For Synchrony, Shane said he expects Q3 results and related commentary on credit to be viewed positively. The analyst sees limited potential for meaningful long-term multiple expansion until renewal uncertainty is removed.

American Express should deliver solid Q3 results and raise its 2018 guidance, Shane said. The recent multiple expansion has begun to price this in, he said. 

"Our Neutral long-term outlook reflects our concerns about seasoning on a credit card portfolio growing [at twice] the industry average." 

The Price Action

At the time of publication: 

• Discover Financial was up 0.36 percent to $77.01. 
• Capital One was trading up slightly at $95. 
• American Express was up 0.17 percent at $108.08. 
• Synchrony was down 0.22 percent at $31.41. 

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