Which Credit Card Should You Shop For This Holiday Season?
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the holiday season nearly upon us, shoppers will soon flock to malls and online retailers armed with a list of loved ones and a credit card. As money continues to change from something physical, like paper and metal, to bits of data, business is booming for credit card companies. With shoppers expected to make ever more electronic payments, here are three credit card companies to watch.
Visa (NYSE: V) has had a great run since its IPO in 2008. Those that got in at the $44 IPO price currently have a triple bagger on their hands. The growth is quite outstanding considering the tough economic times this country has gone through since the company’s public debut.
Visa is the clear market leader, with its logo appearing on more than 60% of credit cards around the world. The company operates differently than rival American Express (NYSE: AXP) in that it doesn’t make any loans. It lets its partner banks take the credit risk, and Visa just sits back and takes a fee on every purchase made over its network.
Visa is the most widely accepted credit card, making it particularly popular for banks releasing new credit cards. This means that 60% market share is likely to climb higher even as competition becomes fiercer with increased consumer spending.
Because of the stock price’s outstanding performance, Visa currently trades at a very high trailing P/E of 45.34. However, its forward P/E is more in line with the competition at just 19.77. With 5-year growth estimates at 19.34%, the company sports a PEG of 1.02. Despite the high valuation, I believe momentum, along with the growth in electronic payments, will continue to take the stock price higher.
MasterCard (NYSE: MA) operates in a similar fashion to Visa, in that it doesn’t actually make loans; it simply collects a fee for each purchase made on its network. It is currently the second largest payment network worldwide, but MasterCard plans to compete aggressively abroad.
In its most recent quarterly earnings report, MasterCard saw credit card purchases rise 3.2% in the U.S. and a much more impressive 11% worldwide. The company expects to double its market share in the Nordic and Baltic regions, two well-performing markets, in the next three years. The company is also further establishing its position in India through a partnership with Thomas Cook Ltd.
MasterCard currently trades for a trailing P/E of 27.51 – significantly lower compared to Visa. However, its forward P/E is slightly higher at 21.16; thus, despite similar growth outlooks to Visa, the company has a higher PEG of 1.13. With a fair valuation, MasterCard may be priced well for investors who are less risk averse.
American Express is a slightly different beast from its credit card brethren. Instead of collecting a fee on each swipe, the company actually loans money to credit card users and charges them interest and other assorted credit card fees.
American Express is looking to differentiate itself from the competition through exclusive partnerships with companies like Facebook and Microsoft (NASDAQ: MSFT). Customers have the ability to sync their AmEx cards with their user profiles on Facebook and soon their Xbox Live accounts. The partnership with Microsoft allows gamers to earn offers through playing games like Halo 4, which can only be redeemed using an American Express card.
Additionally, American Express recently teamed up with Wal-Mart (NYSE: WMT) to bring customers a quasi-checking account called Bluebird. The accounts will be practically void of the usual banking fees, and customers will be able to use the cards anywhere American Express is accepted. American Express looks to capitalize on the huge number of Wal-Mart customers, as well as Wal-Mart’s marketing team, to promote the product.
American Express is by far the least expensive of the three companies, with a P/E of just 12.87. It’s forward P/E is 12.81, but growth is expected to come more slowly than the competition. Analysts expect the company to grow at a rate of 11.13% over the next 5 years, resulting in a PEG of 1.15 – higher than both Visa and MasterCard. The company looks like it will lag behind the competition, so I would wait and see how American Express’s newest partnerships perform before investing.
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adamlevy has no positions in the stocks mentioned above. The Motley Fool owns shares of MasterCard and Microsoft. Motley Fool newsletter services recommend American Express Company, Microsoft, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.