Are the Credit Card Companies Good Buys?
Bob 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 services industry in the United States is dominated by three major companies. The largest by market capitalization is Visa (NYSE: V), which holds a $105 billion market value. Visa is followed by MasterCard (NYSE: MA) and American Express (NYSE: AXP), companies with market caps of around $65 billion each. These three stocks have had great runs over the last few years, enjoying high growth rates of revenues and profits. At this point, are there reasons for value investors to jump into these stocks?
The Fantastic Run-Ups
Visa has had an incredible run since its initial public offering in 2008. At the time, the IPO was the largest ever, at a record $17.9 billion. Shares began trading at $44 per share. Since then, Visa has nearly quadrupled. Operating performance has been impressive, with operating revenues increasing at a compound annual rate of 13.5% since 2008. Diluted earnings per share, meanwhile, have increased 34% per year over the same time period.
MasterCard has performed incredibly as well recently. The company’s shares have almost doubled over the last two years. MasterCard reported positive results for its fiscal fourth-quarter, with revenues rising 10%. Earnings per share clocked in at $4.86, beating analyst expectations by five cents. The growth profile for MasterCard going forward is encouraging, as the company’s focus on emerging markets has led it to predict 20 percent compounded annual growth of earnings per share from 2013-2015.
American Express is trading near its all-time high eclipsed just before the Great Recession of 2008. The company performed decently through the first nine months of 2012, with operating revenues climbing 3.5% year over year. Net income through the first three quarters was basically flat. The company is set to announce full-year results in mid-February. Clearly, the growth at American Express is not as pronounced as it is for the company’s two major peers. However, investors aren’t paying nearly the same price for American Express.
As is all-too common, the high growth rates of Visa and MasterCard have resulted in rich valuations for both. Visa and MasterCard trade for trailing price-to-earnings ratios of 50 and 30 times, respectively. Visa and MasterCard also both trade for price-to-sales ratios greater than 8, and enterprise value-to-EBITDA ratios near 15. It’s clear that both stocks carry rich valuations. Granted, hefty valuations are common and frequently well-deserved for high-growth companies such as these. But at these levels, there isn’t much room for error. In addition, there isn’t much to attract dividend investors either. It’s true that both stocks pay dividends to their shareholders, but these are token payouts, each stock yields less than one percent annually. Even robust dividend growth won’t bring their yields up to sufficient levels to satisfy most income investors.
American Express is the most modestly valued of the three, trading at a trailing P/E of 15. The company also has more to offer investors who crave dividend income from their equity investments, yielding almost 1.5% at recent prices.
Visa and MasterCard have great growth rates and high valuations as a result. American Express may be appropriate for value investors willing to accept lower growth in exchange for a lower valuation. All three are very successful companies and are worthy of further consideration for a wide range of investors.
Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends American Express 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!