Which Credit Card Stock Offers the Greatest Potential?
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the popularity of using credit cards and debit cards instead of cash and checks; payment processing companies like Visa, MasterCard and Discover are seeing more revenue from their payment solutions then ever before. As the US and world economies are still recovering from the economic crisis that began in 2008, now is a great time to invest in one of these three stocks that will see both domestic growth from increasing consumer spending and international growth as countries become more developed and begin moving away from paper currency.
Overview of Key Players
Visa (NYSE: V) is a very recognizable brand name across the world with a global network of payment processing technology. Their technology connects consumers with businesses with fast, easy and secure payment options in more than 200 countries and territories. Visa's revenue is derived from fees charged to its clients for transactions and dollar volume. Visa does not issue cards or extend credit, they simply enable the consumer to process the transaction through their network. According to Visa, 70% of their transactions in the United States are debit and prepaid, not credit. Visa had 23% revenue growth outside of the US and Europe and 14% year-over-year revenue growth from 2011 to 2012. This proves the point the greatest opportunity for these stocks is international.
Much like Visa, MasterCard (NYSE: MA) is a global payment and technology company that enables businesses and merchants to receive secure digital electronic payments instead of cash or check. They offer their customers the ability to have debit, credit, prepaid or other related products. MasterCard provides its products in more than 210 countries and territories. According to MasterCard's 2011 annual report the stock had 21.2% growth in charge programs outside of the US and 31.8% growth in debit and prepaid programs from 2010 to 2011. This shows that the future revenue growth will be derived from outside the US. MasterCard also reported 18.3% year-over-year transaction growth.
Discover (NYSE: DFS) differs from Visa and MasterCard in the fact that they not only offer payment services, but they also operate as a bank holding company and a financial holding company. They have a credit card network called PULSE, ATM's, debit and electronic funds transfer network and Diners club (Discover's global payment network). Discover's banking segment offers loans and deposit accounts and various baking services common to bank companies. Discover pays the strongest dividend at 1.4% with the other two being less than 1%. According to Discover's presentation in November, 2012 they are the largest credit card issuer in China, India and Russia. This will help with revenue growth internationally in the future.
From the chart above you can see that Visa has had the strongest and most consistent revenue growth of the three.
From this chart you can see Visa jumped up ahead of the others early and then slowed as Discover and MasterCard showed strong growth. MasterCard was the only one to have a reported loss through this period.
Company Payment Vol (B) Total Volume Transactions (B) Cards (M)
Visa Inc................. $3,768 $6,029 77.6 2,011
MasterCard............ 2,430 3.240 39.8 1,059
Discover................. 114 122 1.9 59
(Visa 2012 Annual Report.) All numbers in billions except cards.
Visa is the largest company out of all three and is positioned to benefit the most from international emerging market growth. MasterCard is currently experiencing higher growth rates in their international markets, but Discover has the most diversified product offering and the most room for growth. Because I believe all three of these companies will be present solid long term growth opportunities, I am going to pick the winner on a cross sectional valuation.
Company P/E P/B P/S Valuation Price Percent Below Recent Close
Visa..........................62.5 4.6 14 118.23 25%
MasterCard..............30.5 9.4 9.2 295.86 43%
Discover....................8.9 2.2 6.6 25.24 36%
The Bottom Line
My valuation prices were calculated based on if the stock were to trade at its 5 year average valuation. All three stocks are trading significantly higher than their 5 year average valuations, which is the reason the projections are so low. This might not give us an accurate fair value, but it does enable us to see which stock is the cheapest relative to the others. Tihs is Visa. The biggest downside to this valuation is it doesn't incorporate growth or any future events; it only looks at today and yesterday. But based on historical data and its current valuation, Visa is priced right and also has a strong international presence that makes it a very attractive stock with great future growth opportunity.
jk4502 has no position in any stocks mentioned. The Motley Fool recommends 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!