The Zacks Analyst Blog Highlights: Costco Wholesale, Visa, American Express, MasterCard and Discover Financial Services

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Oct 06, 2011, 09:30 ET

CHICAGO, Oct. 6, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Costco Wholesale Corporation (Nasdaq: COST), Visa Inc. (NYSE: V), American Express Co. (NYSE: AXP), MasterCard Inc. (NYSE: MA) and Discover Financial Services (NYSE: DFS).

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Here are highlights from Wednesday's Analyst Blog:

Costco's Earnings Surge

Costco Wholesale Corporation (Nasdaq: COST), one of the leading U.S. warehouse club operators, recently posted fourth-quarter 2011 results. The quarterly earnings of $1.08 per share missed the Zacks Consensus Estimate by a penny, but rose 11.3% from 97 cents earned in the prior-year quarter.

The Zacks Consensus Estimate had remained stagnant with only 1 out of 23 analysts covering the stock raising the projection in the last 30 days.

The increase in the bottom-line was buoyed by double-digit growth in the top-line due to improved sales of discretionary items, as consumers seeking discounts started flocking to warehouse clubs. The company's international operations have been the major driver.

September Sales

Comparable-store sales for the month of September climbed 12%, reflecting a comparable sales growth of 11% at its U.S. locations and 14% at its international divisions. The results were favorably impacted by rising gasoline prices and a weaker U.S. dollar.

Excluding the effects of gasoline prices and strengthening foreign currencies, Costco's comparable-store sales rose 8%, with U.S. comparable sales up 7%, while international comparable sales were up 10%.

Our Take

Costco continues to be a dominant retail wholesaler based on the breadth and quality of merchandise it offers. The company's strategy to sell products at heavily discounted prices has helped it to grow in beleaguered economic conditions as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities. Having delivered consistent comparable-store sales growth, Costco is strongly positioned in the warehouse club industry.

Card Giants Ease Over Fed Rulings

Lobbying charges for Visa Inc. (NYSE: V), American Express Co. (NYSE: AXP), MasterCard Inc. (NYSE: MA) and Discover Financial Services (NYSE: DFS) witnessed a decline for the second quarter of 2011, reflecting reduced anxiety over financial overhaul reforms. All the card giants lobbied the federal government over the recent regulations.

Early this week, Visa, Discover Financial, MasterCard and AmEx reportedly spent $1.44 million, $0.2 million, $0.77 million and $0.61 million, respectively, in the second quarter of 2011.

Lobbying costs for Visa declined 6% year over year and 20% sequentially, the same for Discover decreased by 29% year over year and 44% sequentially. On the flip side, American Express' lobbying costs dipped 3% year over year but were flat sequentially. Furthermore, lobbying charges for MasterCard reduced drastically from $2.33 million in the year-ago quarter and from $0.93 million reported in the sequential quarter.

Lobbying Details

Visa, MasterCard and AmEx lobbied the federal government for multiple issues but primarily over the recent reduction on the interchange fees charged on debit card transactions.

The Dodd-Frank Act signed in July 2010 limited the interchange fees that card issuers charge merchants for using the card, which constitute a major component of card issuers' revenues. These issues have been concerning the card giants, thereby impelling them to lobby for them.

Furthermore, after six months of discussions, the Federal Reserve (Fed) capped the interchange fee at 21 cents per debit transaction in July this year, drastically down from the average of 44 cents.

This in particular is a significant cause of concern for Visa since most of its revenue is generated from the debit card business. The company processes the largest number of debit transactions in the US.

In the April-June period, Visa and MasterCard took the federal government into its confidence regarding the regulation of consumer financial products, interchange fees, online payments, data security, and internet gambling, among other issues. Overall, the company lobbied the Congress, the Federal Reserve and the Treasury Department.

American Express also contacted with the Postal Service and the Internal Revenue Service on credit card regulations, fees charged to merchants for accepting card payments and the creation of a consumer protection agency. The consumer financial protection lobbying issues are primarily related to reloadable prepaid cards, patent reform, tax reform and reform of the US Postal Service.

Meanwhile, Discover took help of the House of Representatives and the Senate on similar issues related to credit card lending, regulation of the fees charged to merchants for processing transactions and the financial regulatory overhaul.

Nitty-Gritty on Financial Reforms

The sweeping new Dodd-Frank Act was enacted to enforce greater regulation on banks and capital markets following the 2008-09 financial meltdown and to protect consumer interests. The Act entails new fees and limits on the card companies, modifying the interest rate hike, charging over-the-limit fees and the banks' requirements to apply payments to higher-rate balances.

Apart from this, the law has imposed new restrictions on the $450 trillion derivatives market, and developed a new consumer-protection division for mortgage and credit-card products.

Although, major repercussions of the financial reform are expected to be felt in the long term, it has already started to influence our cautious outlook on the card giants. Though the new rules will protect credit card users from unreasonable late payment fees, interest rate hikes and other penalty fees, they could adversely affect the profitability of these major card issuers.

Nevertheless, we believe that all the four card giants discussed above are fundamentally strong stocks and are expected to deliver well with the market stability.

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