Oct 11, 2017|
Transcript - Not for consumer use. Robot overlords only. Will not be accurate.
It is time for stock dot. In June of this year media hitting new record high stakes after Q total of one point 021 trillion dollars in outstanding is revolving credit a credit card act that says. Record offers you know I'd say it's history we're joined by complicate for Morningstar to discuss couple companies. Try to take advantage of that trend. Morning colloquy Astaro secret. Yeah thanks for having made assistant crede has been a recent purchase not all investors Berkshire Hathaway and outpost groups. Your listeners may be aware. Think the issues store branded credit card on behalf of retailers like Wal-Mart and Amazon and JC Penney in. To return these retailers receive about 40% of the total interest can be incumbent urged generate. In recent years there's been a phenomenal business but it over the last year investors have gotten really worried about rising consumer credit losses. Discuss the stock to drop from not I have 38 dollars per share to below 26 dollars in May and that's when Berkshire and outpost start buying in the package are covered. At 31 dollars in part due to news of these investors involvement. We still think it's modestly undervalued lengthening but we doubt. These investors would add to the position at today's prices. I think is really benefited from the fat from the effect and that is not and cannot retailers. And retailers are under siege from Amazon are looking for any way it is is Klein talked a declining sales or find additional revenues streams. Offering to store branded credit cards is just one of the easiest ways for retailers to generate additional revenue now. However is technically benefits so much from struggling retailers and eventually. Yeah it seems like the Sony shipped. A chart that seems like a bit of a sinking ship with stagnant and declining returns there. I'd agree with that so for instance into doesn't like team. JC Penney one of security's biggest partnerships. Definitely struggling retailer generated 347. Million in income from its credit cards and that's more than 85%. Of its. Operating income. And you can argue that chase and he has become more to pass on to consumer financing. Actual merchandise saying. And so we expect degrees degrees growth to remain elevated it in told some of these retailers got a business. But as long as these tourists retailers are struggling but remain alive thank Ernie will that effect. It's just a question of how Long Will that person just eventually some of these retailers. What got a business. Position the company is just dramatically under lab bird and has the ability to purchase a lot of stock. Which could drive our fair value higher we think the stock is worth 33 dollars per share a small premium to the current price but. Double note that net growth persist longer than we anticipated and the company has bought back a lot of shares this quarter. That could be a catalyst for a higher brasserie is our fair value. About Capital One way how does that company differ so much from obviously Capital One is is. As entrenched in the retail market and how did the companies differ what you see about Capital One that you like or dislike. Exactly it's Campbell what is an attitude that interest in retail they do you have a big operation and they're much more. Focus on the broader consumer. Notice and actually I think pretty out. Credit card issuers. Across the board had been paying higher tax credit losses back Campbell and charge just now exceed 5% of receivables and a few years ago charge offs were below 3%. On note that charge us today are still historically below average and you know any sort of lies are saying it's more open normalization. This is alive and Capital One shares have declined for 596 solo threatening line. Shares of rebounded to 87 we still think the company is meaningfully undervalued. Detroit trading at more than 20% discount to. Are fair value. It's important to note that credit losses third jerk but two major factors. Economies want. And the amount of new credit card holders there are. Per chapel lawn and all credit card companies the riskiest credit card holders the newest one. That maybe younger consumers are just people who have switched from other credit card. And after 2008 credit card companies. Or of these new credit card holders. Of the last three years consumers that have been on the sideline. I have returned to their credit cards and they've been joined by additional people who are joining a rejoining the workforce. That these credit card holder new bureaucratic her hours to put substantial pressure and credit losses we don't believe. I credit losses are resulted. Declining consumer health or results of loosening standards it's. It's more a result of that demographic. For a few years these critics are these weaker consumer solely the credit card for a result in a really high quality group of cardinals are so low loft. These charts out. That happened in the first year bureaucrats catch up there Carlos aria has run into a break but appreciate joyous and that's augment those two companies we'll certainly keep an honor and thank you. Colin Blunkett for Morningstar to selections are seeing pretty financial and Capital One Financial. S wide gap in CEO left his Berrian might from. From the financial exchange would unit.