By John Spence
BOSTON (Dow Jones) -- An analyst upgrade of credit-card stocks
Capital One Financial Corp. and Discover Financial Services helped
lift the shares on Tuesday as the broader financial sector bounced
off the mat.
Stifel Nicolaus analyst Chris Brendler in a research note
Tuesday said that even though the companies will feel the pain of a
severe recession, they should be able to weather the storm.
Brendler also pointed to compelling valuations -- the stocks are
trading near fresh lows in the wake of another disappointing jobs
report. Last week, the Labor Department reported the U.S. economy
lost 651,000 jobs in February as the unemployment rate jumped to
more than 8%.
Despite Tuesday's rally, shares of Capital One (COF) are down
more than 70% so far this year, while Discover (DFS) and American
Express Co. (AXP) are off more than 35% each for the period.
Stifel upgraded Discover and Capital One to buy from hold and
kept its hold rating on American Express. However, the 2009 profit
estimates for all three companies were reduced to reflect higher
loss and delinquency outlooks. The forecasts also assume
unemployment peaks at 10.5% in March 2010.
The stocks' valuations "imply that there is a significant
probability these companies won't survive the deepening recession
in their current form," Brendler wrote. There are many concerns
swirling around the companies. They may need to raise capital to
cover mounting losses and new accounting rules for
securitizations.
On Monday, Capital One said it was cutting its dividend by 87%
to conserve capital.
Other fears include liquidity with credit markets frozen, and
political risks such as so-called cramdown legislation and new card
rules, the analyst said.
"We have done a deep dive on all of these issues and have
concluded that while the risks are certainly unprecedented, they
are overly discounted in the current valuations," Brender
noted.
"We recognize this may be [and in all likelihood will be] too
early," the analyst wrote, adding that Capital One and Discover are
trading below 50% of tangible book value. "But we also can't ignore
the compelling valuations given our near-term catalysts."
The catalysts include seasonality as tax refunds start to come
in, government aid and improved visibility on political risks,
according to Stifel.