What Credit Companies Are Buys?

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

Many people are now living on credit.  It seems to be quite easy and convenient for users to purchase now, and think about the payment later. The credit card industry is the direct beneficiary of this trend. Indeed, Visa (NYSE: V), MasterCard (NYSE: MA), and American Express (NYSE: AXP) have delivered good returns for their shareholders over the years. The 5-year total return chart shows it all.

<img src="/media/images/user_14219/screen-shot-2012-11-26-at-110500-am_large.png" />

Visa leads the group with more than a 170% return, whereas in the last 5 years MasterCard and American Express delivered a 134% and 48% return, respectively. So, in the rear view mirror, Visa was a winner for investors. How about the future? Should investors bet on Visa as well, or on the other two? Let’s find out. 

In terms of brand identity,  big spenders may be most familiar with American Express. It is the brand known for ease of use, customer loyalty, and trust. It has a “spend-centric” business model, concentrating on delivering revenue by driving spending, whereas finance charges and fees are only secondary. In 2011, around 70% of its $30 billion of revenue were generated from activities inside the US. Visa and MasterCard have more international users. Visa is considered to be a global payment technology company with its presence in more than 200 countries and territories. Its revenue was derived from fees paid by clients based on volumes of payment and from other financial services. The operating revenue derived from US market in 2011 was $5.7 billion, accounting for nearly 54.9% of its total revenue. Similarly, MasterCard is reported to have its presence in more than 210 countries and territories with more than 150 currencies. In 2011, the net revenue generated in the US accounted for 39.6% of its $6.7 billion total revenue. The US was the only country, which accounted for more than 10% of MasterCard’s revenue in any period. Furthermore, Visa and MasterCard are quite similar that both of them partnered with banking institutions to be their middleman, whereas American Express could directly lend money to consumers. 

In terms of global market share, in 2011, Visa was still the market leader with more than $3.7 trillion dollars in payment volume, with 77.6 billion transactions and more than 2 billion cards. MasterCard took the second place with $2.43 trillion in payment volume; with 39.8 billion transactions and more than 1 billion cards. The third place belonged to American Express with 808 billion in payment volume, with 5.3 billion transactions and 97 million cards.

In terms of financial figures, it seems that MasterCard is the best bet for now.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>V</strong></p> </td> <td> <p><strong>MA</strong></p> </td> <td> <p><strong>AXP</strong></p> </td> </tr> <tr> <td> <p><strong>Net margin (%)</strong></p> </td> <td> <p>20.57</p> </td> <td> <p>30</p> </td> <td> <p>16.15</p> </td> </tr> <tr> <td> <p><strong>ROIC (%)</strong></p> </td> <td> <p>7.93</p> </td> <td> <p>33.73</p> </td> <td> <p>5.83</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>N/A</p> </td> <td> <p>2.9</p> </td> </tr> <tr> <td> <p><strong>Forward earnings</strong></p> </td> <td> <p>18</p> </td> <td> <p>18.6</p> </td> <td> <p>12.2</p> </td> </tr> <tr> <td> <p><strong>Dividend yield (%)</strong></p> </td> <td> <p>0.7</p> </td> <td> <p>0.3</p> </td> <td> <p>1.4</p> </td> </tr> </tbody> </table>

Among the three, MasterCard has the highest net margin and an extremely high return on invested capital over the previous 12 months. Its 33.7% return on invested capital is four and five times higher than those of Visa and American Express. That might be the reason why MasterCard has a slightly higher forward earnings valuation of 18.6x. Visa has a very high trailing P/E of 46x, but only 18x forward P/E. Both Visa and MasterCard employs no debt whereas the D/E of American Express is 2.9x due to a different business model, which was discussed above.

My Foolish Take

Investors would feel safe by betting on all three companies. Visa seems to be a good bet with its market leader position and its economies of scale. However, I would personally choose MasterCard because of its highest margin and the highest return on invested capital compared to the other two companies.


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of MasterCard. Motley Fool newsletter services recommend American Express Company 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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