One of These Three Credit Card Companies Is a Buy

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

The credit card world is dominated by three big players.  But not all credit card companies are the same.  In this article we'll examine the top three players using valuation and growth projections to select a winner for our long term portfolio.

Visa (NYSE: V) is the largest of the three with a market cap of $99.45 billion.  It's currently trading at $148.70 which is close to its all time high of $150.72.  Looking at a one year chart (Figure 1) the stock's run looks impressive, but is it sustainable?

Figure 1:

<img src="/media/images/user_14634/visa-chart_large.png" />

Over the past year Visa is up over 50% and continues to climb.  However, this price appreciation has left Visa with some questionable fundamentals (Figure 2) which call into doubt future price increases of this magnitude.

Figure 2:

<table> <tbody> <tr> <td>Valuation</td> <td>Visa</td> <td>Industry</td> </tr> <tr> <td>P/E</td> <td>47.00</td> <td>34.20</td> </tr> <tr> <td>Price to Sales (TTM)</td> <td>11.56</td> <td>2.88</td> </tr> </tbody> </table>

It's very obvious Visa is trading at a premium when compared to the industry.  But let's take a look at the future predictions (Figure 3) and see if Visa deserves this premium.

Figure 3:

<table> <tbody> <tr> <td>Valuation</td> <td>Visa</td> <td>Industry</td> </tr> <tr> <td>Growth Estimate Next 5 Years</td> <td>19.79%</td> <td>13.64%</td> </tr> <tr> <td>PEG Ratio</td> <td>1.04</td> <td>-5.44</td> </tr> </tbody> </table>

Solid growth estimates and a favorable PEG ratio all point to very good things in the future.  Visa's Forward P/E is currently at 17.79 with earnings projected to be at $8.36.  Now if we were to apply these projected earnings along with the premium that Visa commands we can see a stock price of $392.  That's well over a 150% increase from the current price.

A few More Facts To Consider.  

Visa has the largest user base, the largest dollar amount per transaction, and, finally, Visa has a 5 Year net profit margin of 29.20% vs. an industry average of 7.40%.

Visa may seem expensive based on current metrics.  However, when you take into account projected growth it doesn't seem too outrageous.

Master Card (NYSE: MA) is the second largest by both market cap and customer base.  It is currently trading at $485.50 just off its all time high of $494.51.  The one year chart for MA (Figure 4) looks almost as impressive as that of Visa with a 28% gain.

Figure 4:

<img src="/media/images/user_14634/master-card-chart_large.png" />

Taking a quick look (Figure 5) we see that MA appears to be fairly valued compared to the industry, but is still an out-performer in many ways.

Figure 5:

<table> <tbody> <tr> <td>Valuations</td> <td>Master Card</td> <td>Industry</td> </tr> <tr> <td>P/E</td> <td>28.20</td> <td>34.20</td> </tr> <tr> <td>Sales per Share 5 Year Growth Rate</td> <td>11.51%</td> <td>3.23%</td> </tr> <tr> <td>Earnings per Share 5 Year Growth Rate</td> <td>10.62%</td> <td>9.86%</td> </tr> <tr> <td>Net Profit Margin 5 Year Average</td> <td>22.90%</td> <td>7.40%</td> </tr> </tbody> </table>

With next years estimates for earnings at $25.50 and taking into account current P/E we can project a price of $719 by the end of 2013.  That's nearly a 50% increase over the current price.  While impressive, it doesn't come close to the projected 150% from Visa.  However, one could make the argument that with the lower valuation of Mastercard, a downturn in this sector would hit Visa harder than MA.  Therefore MA affords an element of safety that Visa does not.

American Express (NYSE: AXP) may be a favorite of Warren Buffett, but does it belong in your portfolio as well?  AXP is currently trading at $55.55 which is approximately 9% below its 52 week high of $61.42.  Looking at the one year chart (figure 6) we can see that AXP has stalled recently.

Figure 6:

<img src="/media/images/user_14634/axp-chart_large.png" />

 Could this be a buying opportunity or a warning sign of something on the horizon?  Let's dig a bit deeper and find out.  First we'll take a quick look at some key statistics (Figure 6).

Figure 6:

<table> <tbody> <tr> <td>Valuations</td> <td>American Express</td> <td>Industry</td> </tr> <tr> <td>P/E</td> <td>13.00</td> <td>34.20</td> </tr> <tr> <td>Price to Sales (TTM)</td> <td>1.87</td> <td>2.88</td> </tr> <tr> <td>Sales (MRQ) vs Quarter 1 Year Ago</td> <td>3.40%</td> <td>4.80%</td> </tr> <tr> <td>Growth Estimate Next 5 Years</td> <td>11.13%</td> <td>13.64%</td> </tr> </tbody> </table>

It looks like the low P/E ratio for AXP is well deserved.  It doesn't appear to be growing as fast as the industry and will absolutely not keep pace with both Visa and Master Card if the projections hold true.  While the dividend yield that AXP pays out (1.40%) is above that of Visa (.89%) and Master Card (.25%), that alone will not be a significant factor.  Using the forward earnings estimates of $4.73 we arrive at a $61 price target. That's only about 10% above the current price.  Throw in that dividend yield and we're still only at 11.40%. Not an attractive return for a one year wait.

Now that we have examined all three we can easily eliminate AXP as a potential candidate.  While the P/E may seem attractive it is unlikely that AXP is going to produce significant returns.  That leaves us with Visa and Master Card.  While Visa may seem to have the most potential for growth, the valuations are optimistic. Visa is a stock that is priced for perfection.  If there is a miss on earnings/guidance or a downturn does manifest in this sector, Visa will most likely see the worst price drop.  Master Card, which represents the middle ground, seems to be the long term winner based on valuation, future projections, profitability, and safety.

Lulupoopsalot 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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