Goldman Is Buying, Selling These Credit Card Stocks

• Shares of Discover Financial Services DFS, Synchrony Financial SYF and American Express Company AXP have declined in the last one month.
• Goldman Sachs’ Ryan M. Nash maintained positive ratings for Discover Financial and Synchrony Financial, while downgrading American Express.
• Credit card stocks could reverse their downward trend in 2016, Nash stated.

Credit card stocks may rebound “from an abysmal year” in 2015. Having underperformed last year due to higher credit losses and increased funding costs, these shares are likely to reverse in 2016, with losses likely to “remain benign” and funding bases likely to “prove more resilient than expected,” analyst Ryan Nash commented.

Discover Financial

Nash maintained a Buy rating for the company and a price target of $63, while saying that this was the top pick following Synchrony Financial. The analyst expects 2016 estimates to stabile, which would boost Discover Financial’s shares.

He also cited the following:

1. Loan growth should return towards the high end of the 3-5 percent range
2. Greater-than-expected NIM upside as rates rise
3. Expenses below $3.6bn
4. Capital returns to exceed 100 percent.

“In addition, we believe there is significant value here the market is not paying for – $6-$8 of excess capital and a network that could be worth $8bn in a strategic transaction. Longer term, funding synergies with a larger institution could unlock a $6bn of value,” Nash mentioned.

Synchrony Financial

Goldman Sachs added the company to its Conviction List, naming it as the top pick and maintained a Buy rating and a price target of $37.

Nash expects the company’s shares to begin to “re-rate higher” following a positive 2016 EPS outlook. He also projected:

• High single-digit loan growth to continue, with improvement in retailer penetration
• Credit losses to remain relatively stable
• NIM benefits from liquidity deployment and stable asset yields
• Beginning to return some of its $3.7bn of excess capital and leveraging some for portfolio wins

American Express

The analyst downgraded the rating for the company from Buy to Neutral, while reducing the price target from $89 to $72. He cited limited EPS visibility and expects results to continue to be remain volatile, keeping the shares range bound.

“Unlocking of value via strategic actions remains possible, but management’s stated unwillingness makes it a low probability event, in our view,” Nash wrote. He added that while American Express represents significant long-term value, there is “better near-term value elsewhere.”