Credit Card Plays for Your Portfolio

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

It’s a well-known fact that with reduced unemployment rates and rising incomes, consumer spending increases. Further increasing consumer spending is the improvement in the general economic sentiment. According to the recent economic data, consumer spending rose by 0.8% and incomes rose by 0.4%, both figures beat the street’s estimates. Of particular note is the surge in consumer confidence, which is at its highest levels since 2008. Additionally, with a low interest rate environment, the savings rate dipped to 3.3%. Altogether, these reasons provide a bullish case for credit card companies.

Mobile Payments: The Way to Go

However, despite these economic numbers, credit card usage has been falling, mainly due to the introduction of mobile payments. Credit card majors MasterCard (NYSE: MA) and Visa (NYSE: V) are looking to rapidly expand their mobile payment solutions throughout the world. Visa and PNC Financial, under a partnership, have introduced the mobile payment solution called “V.me.” MasterCard also launched its “PayPass” that is available in 41 countries across the globe and is deployed by over 100 issuers. Discover Financial Services (NYSE: DFS) has also launched its credit card in collaboration with eBay, which has lately been the growth driver for Discover Financial Services.

Opportunities in China

Credit card companies believe that China is their biggest potential market, as the credit card penetration is fairly low with 285 million cards, even when the country is resided by 1.34 billion people. China Mobile alone services 1.08 billion subscribers, which is higher than the number of credit card users in the country. Owing to this low penetration, credit card companies are bullish on expanding their user base in China.

The World Trade Organization recently ruled that China’s domestic payment system “Union Pay” has been operating in an illegal monopoly in the country. Foreign credit card companies are forced to operate through Union Pay’s network, which results in higher credit card fees. With the WTO’s ruling, we can expect China to allow foreign credit card providers, to operate through their desirable payment channels. In my opinion such a move would lead to competitive pricing, and expansion of user bases of companies like MasterCard, Visa and Discover Financial Services.

The Numbers Game

The three companies have geographical diversified business operations, with Visa operating in 170 countries, MasterCard in 210 countries, and Discover Financial in 185 countries. In June, MasterCard announced its $1.5 billion share buyback program and in the recent quarter, the company repurchased around 500,000 of its shares for about $216 million. Visa also recently announced its $1.5 billion share repurchase program. Back in March, Discover Financial had announced its $2 billion share buyback program, which is expected to complete by March, 2014.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Qtrly. Net Earnings Growth YoY</p> </td> <td> <p>Qtrly. Revenue Growth YoY</p> </td> </tr> <tr> <td> <p>Visa</p> </td> <td> <p>10%</p> </td> <td> <p>5%</p> </td> </tr> <tr> <td> <p>MasterCard</p> </td> <td> <p>21%</p> </td> <td> <p>15%</p> </td> </tr> <tr> <td> <p>Discover</p> </td> <td> <p>2.5%</p> </td> <td> <p>6.3%</p> </td> </tr> </tbody> </table>

From the table we can see that Visa has clearly grown the fastest of the three. Both Visa and Discover Financial outperformed the street’s estimates, but MasterCard fell short of the estimated 7% revenue growth.

<img src="http://media.ycharts.com/charts/9bc7ffbcd042f9659d9d15819b0a7365.png" />

V data by YCharts

Above attached chart indicates the relative stock performance of the three companies, over a period of 5 years.

Conclusion

Out of the three companies, Discover Financial is not a direct competitor of Visa and MasterCard, as it’s a banking and payment services company. According to the recent economic data, the credit card default rate in the US dropped by more than 1.5% in September YoY, which makes Discover Financial a good investment option. For investors looking to capitalize on just the growing consumer spending, Visa appears to be the best investment option as it grew at the fastest pace, has the largest retail electronic payments network, and operates with little or no debt.


PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of MasterCard. Motley Fool newsletter services recommend 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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