What Makes This Credit Services Company a Good Bet?

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

Revenue and macroeconomic conditions have a very strong positive co-relation for credit services companies. Any improvement in the macroeconomic conditions gets reflected in the revenue of credit services companies. Recent reports from various agencies have indicated that the macroeconomic conditions in the developed countries have shown signs of improvement, which augurs well for this industry. This will help the major players in the industry like MasterCard and Visa improve their revenue.

Visa's (NYSE: V) share price has gained 50% in the last year, significantly outperforming the S&P500. The company has been expanding its business in the international market and has made heavy investment in mobile and e-commerce. I believe the company will continue to give better returns than the market in the coming quarter as these strategies will help it increase its revenue and profit margin

Expansion in the emerging economies in Asia and Latin America

About 65 % of the company’s total revenue comes from the US alone. The company has plans to reduce this to 50% by 2015. In order to achieve this, the company has plans to expand in the emerging economies in Asia and Latin America. The company has been increasing its tie ups with the local financial operators in these countries to increase Visa card usage. It is expected that, with rising PPP in these countries, the usage of the electronic card will increase. Also the mobile penetration in these countries is higher than the bank penetration, which will help increase its revenue.

Shift from cash payment to electronic payment will help Visa increase its customer base

According to estimates, payments through cash and checks are still prevalent in both developed and developing countries. According to the company, worldwide $11 trillion of personal consumption expenditure is still operated by checks and cash. If only even 0.1% of this comes to Visa, it will make $10 billion of revenue for the company. As more and more people are moving to online, mobile and card payment, this is achievable in the long term.

e-Commerce and mobile expansion will help penetrate in customer bases that don’t have banking facilities

According to eMarketer, the e-commerce business in 2012 surpassed $1 trillion. The e-commerce sales are growing by 21.1% per year. Visa has a presence in 50% of the market in some way or another. To increase its e-commerce offerings, the company has made many acquisitions in recent years. These acquisitions include CyberSource, Fundamo, and PlaySapn. These acquisitions will be helpful for the company to increase its revenue in the coming years. The company has also planned to incorporate these technologies into its mobile strategy.

The mobile penetration is estimated be around 85% worldwide. The expansion of financial services via mobile technology is useful for the customers who do not have any bank accessibility. To leverage the penetration of the mobile segment, Visa started V.me.

Peer analysis

MasterCard (NYSE: MA): MasterCard is the biggest player in the credit services industry. The company has more diversified revenue when compared to Visa. The US market contributes only 39% to its revenue as compared to 56% for Visa.

MasterCard has taken several initiatives to increase its presence in the mobile and online transactions. The business of this credit service is more market driven. So we believe the improved macroeconomic conditions and enhanced customer confidence will help the company garner higher revenue in the coming quarter.

American Express (NYSE: AXP): American express posted strong results for the quarter ended in March. The company’s US division posted strong results with a 5% increase in revenue. With the improved consumer sentiments and better macroeconomic condition in the US, we expect the company to post a strong second quarter result ending in July.

The US contributes about half of the revenue of American Express. But the company has been undergoing expansion in the international markets as well. In the other countries, the company has teamed up with the financial institutions to issue third party cards. This strategy will enhance the presence of American Express in other countries as well.

Ratio analysis

 

P/S ratio

Forward P/E

PEG Ratio

EV/EBITDA

Visa

11.14

21.70

1.35

17.22

MasterCard

9.61

19.75

1.32

15.76

American Express

2.87

14.77

1.38

N/A

Looking at the P/S ratio, Visa is at a premium with respect to its peers. This is because, investors believe that the future prospects for Visa are better compared to its peers. The forward P/E ratio for Visa is also high compared to its peers, while the PEG ratio is comparable.

Conclusion

Visa has been making acquisitions to enhance its e-commerce business and also has invested to increase its offerings in the mobile segment. Currently 56% of Visa revenue comes from the US alone, but the company has planned to increase the percentage of international revenue to 70% of its total by 2015. The company has been collaborating with financial institutions and merchants in other countries to use its card. These strategies will help it increase its customers and also provide additional revenue streams. So, I am bullish on Visa stock compared to MasterCard, which has far more global reach, so making further penetration will be difficult for it.

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Lalit Kumar 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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