Who Is the Leader in the Credit Card Industry?

Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

You might no longer have to decide between cash or credit, since the leading credit card companies in the world also offer compelling growth prospects and promise to deliver plenty of cash to stockholders over the years. Visa (NYSE: V), American Express (NYSE: AXP), and MasterCard (NYSE: MA) are the leading companies in the industry and, most certainly, the most famous credit card brand names throughout the world. Below, I will look into them in order to determine which ones could provide good returns for your money.

The payments Goliath

Visa is one of the best-known credit card and payments companies around the world. Operating in over 200 countries, its brand is as strong as it gets, and so is its moat; thousands of banks and financial institutions worldwide issue Visa cards, which, in time, charges them variable fees for each monetary transaction process.

Merchants usually absorb the largest percentage of the service charges, creating some resistance among them. However, not accepting this card would result in detrimental loses at many locations, a fact which forces the sell-side to use this company's system as well.

But, not only banks and shop-owners need Visa's services. Individuals must chose to use Visa over other credit cards, too, and this is where the company's brand name comes back in. People know that using Visa cards is convenient in many ways and feel reassured by its trustworthy reputation.

People seem to be moving away from paper-based payments and into other methods. This should benefit Visa over the years, as countries around the world continue to develop their economies. The company is also very strong in the electronic payments segment, which will also provide plenty of growth opportunities in upcoming years, especially as internet transactions increase. With a solid balance sheet, no debt, and plenty of cash available for future purchases, Visa seems well-positioned to explore this growth avenue that has delivered compelling early results.

Having posted strong results last quarter and repurchased $1.8 billion in stock, while yielding some dividends (0.67%), this company looks attractive. Despite its valuation at 50 times its earnings, more than double the industry average, I would recommend buying this stock on account of its strong, moated brand, and its growth prospects - EPS is expected to rise by around 18.5% each year over the next five.

The second runner-up

MasterCard is the world’s second-largest credit card company, with an approximate market share of 31% - only beat by Visa’s 63%. The system works just like Visa’s; through a strong brand name, the company creates incentives for merchants and financial institutions to use MasterCard's services. Once again, getting individuals to use MasterCard over cash or other cards remains a challenge. However, the company's most successful marketing campaign has led people around the world to believe that “there are some things money can't buy. For everything else, there's MasterCard.”

A strong brand recognition should also help the company enter new markets, where merchants tend to prefer well-known worldwide brands. These under-penetrated markets provide huge expansion opportunities for the firm. Over the past few years, increasing cross-border volumes have provided evidence to back this hypothesis.

MasterCard is also poised to benefit from the ever-increasing use of credit cards and electronic payment methods over paper-based ones. The firm's hard-to-duplicate scale and network reach provide it with an edge over existing competitors and new entrants. Moreover, the current payment volume usually requires less than 70% of the network’s operating capacity, leaving plenty of room for growth before hefty investments are needed.

The company has a strong balance sheet and substantial amounts of cash available for spending (management has made prudent and profitable investments in the past). With no long-term debt due over the next few years, and an above-average expected EPS growth rate of 17%-18% per year, this stock looks like a long-term BUY. Although its valuation at 25 times its earnings is a little higher than the industry average of 20 times, I believe that the company is worth the premium. Moated and poised to grow, while returning value to investors through stock repurchases and dividend payouts, this is a company you should hold on to.

The limits of the unlimited card

American Express is also among the most famous credit card brands in the world. It has dug an economic moat for itself on the back of outstanding rewards and services. These features have attracted big-spending cardholders who, in turn, have allured many merchants, even in spite of the firm’s higher fees, which then serve to fund the firm’s reward program while still generating good margins (Morningstar). 

Unlike its two competitors above, American Express doesn’t only offer transaction processing services, but also issues its own cards. This provides both higher margins and a massive source of information concerning consumer tastes and trends. Over the past few years, the firm has decided to monetize this knowledge, and early results look quite promising, portraying a growth outlook for the upcoming years. American Express's efforts to penetrate lower-end markets and mobile payments segments might provide plenty of upside, too.

Trading at 18 times its earnings, valued the lowest of the three companies in this article, I would still recommend holding onto this stock for now. Its lower valuation reflects lesser growth prospects for the years ahead. Analysts expect American Express to deliver a 12% annual EPS growth rate over the next five years, under-performing the industry and its main rivals, Visa and Mastercard. Concerns about the future are many, from increased competition in the premium segment to a deterioration of the firm’s brand name due to its incursion in lower-end market sectors. In addition, the firm’s interest yields are expected to remain sluggish for some time, while volatility in overseas markets, which represents an important part of the company’s revenue, provides more reasons to feel doubtful about future performance.

Bottom line

Credit card companies make money by giving users “money” in advance, funding their purchases. Why not invert this trend? Financing credit card companies by purchasing their stock can deliver plenty of upside for investors - it’s just a matter of choosing the right firm. From my point of view, Visa leads the bunch, followed closely by MasterCard. Despite their above-average valuations, their above-average growth potentials make them "buy and hold" cases. 

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Damian Illia has no position in any stocks mentioned. The Motley Fool recommends American Express, MasterCard, and Visa. The Motley Fool owns shares of MasterCard. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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