Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week’s analysis includes American Express (NYSE: AXP), Capital One (NYSE: COF), Discover Financial Services (NYSE: DFS), Home Depot (NYSE: HD) and Wal-Mart (NYSE: WMT). To see the Zacks Industry Rank and the trend in earnings estimates revisions for more than 200 industry groups, visit http://at.zacks.com/?id=3154.
Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior Market Analyst for Zacks.com.
Last week, the Federal Reserve published data showing credit card delinquencies reached 4.86% in the first quarter. This was the highest rate since the third-quarter of 2002.
Credit card charge-offs were above their historical average as well, reaching 4.7%. The last time charge-offs reached this level was during the fourth-quarter of 2005.
At the same time, use of revolving debt has increased. Revolving debt totaled $957.2 billion in March, a 7.9% increase. March marked the biggest annual increase in over a year.
The problems are not just limited to this side of the pond either. Standard & Poor's recently calculated increases in British credit delinquencies and charge-offs, at 5.88% and 6.51%, respectively.
The potential for a credit card crisis is a worry for some bears, and the concern is not completely unwarranted. The housing slump, rising food and energy prices and a weak labor market is forcing more people to rely on credit cards.
The data on the probability of a credit card crisis remains inconclusive, however:
- Last week, Home Depot's (NYSE: HD) CFO, Carol Tome, told Dow Jones that her company was tightening lending standards and raising interest rates on a co-branded card it offers.
- Eduardo Castro-Wright, head of U.S. operations for Wal-Mart (NYSE: WMT), has observed a decreased usage of "credit as a form of payment" since the third-quarter.
- Capital One (NYSE: COF) recently released statistics showing delinquency rates falling to 3.9% in April, from 4.04% in March and 4.36% in January. The annualized net charge-off rate rose slightly, however, to 6.08%.
- American Express (NYSE: AXP) experienced a rise in delinquency rates to 3.8% during the first quarter, up from 3.4% during the fourth quarter. The net write-off rate jumped to 5.5%, from 4.5%.
- Discover Financial Services (NYSE: DFS) saw its delinquency rate reach 3.93% and its charge-off rate reach 4.37% during the first quarter.
The trends are not positive, but neither do they suggest that another financial crisis is about to occur. There is speculation that people would sooner have their homes foreclosed on than give up their credit cards. This seems logical since a credit card gives a person spending power, regardless of their housing situation.
The biggest question is whether there will be more charge-offs and delinquencies over the next several months. Though above historical averages, the numbers for the first quarter are still well below the high water marks seen previously. For example, delinquencies stayed above 5% throughout 1991 and into 1992. Charge-offs nearly reached 8% during the first-quarter of 2002.
Still, the current situation is bad enough to give investors another reason to avoid financial stocks. The sector continues to account for a disproportionate level of negative estimate revisions and the rising level of credit card late payments is just another factor weighing on earnings estimates. (Full-year earnings estimates for both COF and DFS have been cut within the past 30 days.)
It should also be noted that many of the large credit card issuers also provide multiple other financial services. Therefore, while AXP, COF and DFS may be more reliant on their card businesses than most, the problems with the credit card delinquencies are more of a sector problem than an industry or company-specific issue.
The interactive Zacks Industry Rank List allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. See the list at http://at.zacks.com/?id=3208.
About Zacks Industry Rank and the Zacks Rank
Zacks Industry Rank is calculated by averaging the Zacks Rank for all covered companies within a given industry. The Zacks Rank is assigned to approximately 4400 stocks and ranges from #1 (“Strong Buy”) to #5 (“Strong Sell”). Both the Zacks Industry Rank and the Zacks Rank are quantitative indicators designed to cover periods of 1-3 months.
Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank stocks have generated an average annual return of +32%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have underperformed the S&P 500 by 129% annually (+5 % vs. +12%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.
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