How Much Longer Will You Carry Cash?
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Doomsday preppers may keep cash and gold around, but how much cash will you carry around in say...two to five years? The cashless society has proven so dire for Kenyan pickpockets they held a press conference begging legislators to do something to protect their profession.
Not an Onion news report, these were real pickpockets. The solution according to pickpockets is for the government to train them to skim ATM cards. Really?! The threat to their livelihood is all too real, however; as of April, New Zealand is almost a cashless society according to Mastercard(NYSE: MA). There are three main beneficiaries of the cashless trend, American Express (NYSE: AXP), the aforementioned Mastercard, and Visa (NYSE: V).
Although financials, these three have few of the risks of banks. As toll collectors for transactions there is little downside risk with tiny fees on billions of transactions annually. Visa's VisaNet processor is capable of processing 30,000 transactions per second.
With 60% penetration in the US electronic payments space the credit card companies seek growth overseas. China is a no-go as the government has shut out foreign cards in favor of its China UnionPay. India is a huge market with only 8% of all transactions taking place electronically.
Everywhere you want to be?
Visa will be reporting on July 24, and if past is prologue investors should be cheered by results. As the biggest dog in the global payment network space Visa is best poised to benefit from a cashless society. Currently 85% of financial transactions are still by cash or check worldwide so that leaves a huge addressable market for all three credit card names.
Visa is close to 52-week highs, having gained over 50% this last year. It has a trailing P/E of 52.90 but the PEG is only 1.34 with analysts seeing 18.56% growth per year for five years. It offers a 0.70% yield. It also has an astounding operating margin of 60.17%.
By 2015 Visa expects fully half of global revenues to be ex-United States. It is expanding its mobile wallet solutions to capture the ever-growing e-commerce and mobile payment market. Here, like its rivals, it will be challenged by eBay's PayPal, privately held Square, and Google. Visa acquired CyberSource in 2011 to help build its mobile wallet business.
Also challenging these three are increasing credit card delinquencies, litigation, the effect of Dodd-Frank, and any other regulations legislators dream up, like the Durbin amendment to Dodd-Frank which limited processing fees to $0.22 per transaction.
Trefis gives a price target for Visa of $150, a full 15% below its recent price of $188.00. There is historical basis for such a hit to share price as during the time when regulation uncertainty was hanging like a sword of Damocles over these payments processors the share price declined just around 15% for Visa and even more for its brethren.
Don't leave home without it?
American Express differs from these as it does have lending risk associated with its cards, unlike Visa and Mastercard which expect the associated banks to assume that risk.
Now, American Express is a Warren Buffett hold at 12% of his portfolio and 13.74% of outstanding American Express shares. He understands that American Express is a company that attracts higher-net worth individuals to its financial products and travel-related services.
American Express is still a toll road, but it decides who gets on the road in the first place, preferring the prosperous who can afford the annual fee and can pay off a full balance every month. As the company presented at the William Blair Growth Stock Conference in June the American Express cardholder outspends the Visa and Mastercard holder nearly three to one and five to one with the proprietary (i.e. premium) Gold, Platinum, Black, etc. cardholders.
This is the kind of name Buffett likes to hold forever: a 153 year old company that has a reasonable valuation at a forward P/E of 14.65 with a yield of 1.20% at a reasonable payout ratio of 20%. The company has gradually grown its market share of US credit/charge purchase volume from 19.9% in 1999 to 26.4% in 2012.
No, it doesn't have the stunning operating margin of Visa at only 22.73% and analysts see only 12.08% five year EPS growth. But like most Buffett names it is a solid, steady performer with the stock outperforming the S&P 500, up 30% over the last year. It has consistently been raising its dividend for ten years and buying back stock.
Although American Express is generally more high-end, it's partnering with Wal-Mart on the Bluebird card, a credit and debit alternative they call it, to appeal to the millions of Americans without credit cards or checking accounts. For many working poor this is a much better alternative to check cashing businesses that take a substantial cut of the paycheck. The company is reporting Q2 earnings on July 17 and analysts will be interested in the success of Bluebird.
Is it really priceless?
Mastercard has achieved an African coup, inking an agreement with Nigeria to have its payment system included in state issued identity cards, 13 million now and soon up to 100 million. If all goes well this gives Mastercard a huge advantage in the continent as this Fellow Fool details. Look for a Nigerian pickpocket press conference soon!
Mastercard trades at a trailing 25.85 P/E with a .40% yield. Aptly headquartered in Purchase, NY, its operating margin is 53.91% with no debt and more fairly valued than Visa with an EV/EBITDA of 15.65 to Visa's 17.22. It has a larger insider hold at 10.54% to Visa's .10% but trades at 10.76 price/book, more than twice Visa's 4.62.
Mastercard has the same overseas opportunities as Visa and now a strong African head start. It hit a 52-week high of $595.03 on July 5. It has also been buying back shares and analysts predict 17.67% five year EPS growth.
Which card to carry?
For value one should buy American Express, but for growth, all things being equal, Mastercard is the priceless name with growth close to Visa and fairer valuation. Even if you still carry cash, carry one of these cards in your portfolio.
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AnnaLisa Kraft 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!