Which Credit Card Company Is the Best Investment?

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Are card companies the new tobacco? Card stocks such as MasterCard (NYSE: MA), Visa (NYSE: V), American Express, and Discover Financial Services have an almost recession proof product, high free cash flow, and low operating costs. The two biggest players in this international market are Visa and MasterCard. How do they stack up against each other?

<table> <tbody> <tr> <td rowspan="2"> <p> </p> </td> <td rowspan="2"> <p>Q3 Total Cards</p> <p>(Millions)</p> </td> <td rowspan="2"> <p>Q3 Total Transactions</p> <p>(Millions)</p> </td> <td colspan="2"> <p>Q3 Gross Dollar Volume (Billions)</p> </td> <td rowspan="2"> <p>Average Dollar Volume per Card</p> <p> </p> </td> <td rowspan="2"> <p>Average Transactions per Card.</p> </td> <td rowspan="2"> <p>Average Dollar Volume per Transaction</p> </td> </tr> <tr> <td> <p>Worldwide</p> </td> <td> <p>US</p> </td> </tr> <tr> <td> <p>Visa</p> </td> <td> <p>2032</p> </td> <td> <p>20,532</p> </td> <td> <p>$487</p> </td> <td> <p>$521</p> </td> <td> <p>$496</p> </td> <td> <p>10</p> </td> <td> <p>$49</p> </td> </tr> <tr> <td> <p>MasterCard</p> </td> <td> <p>1859</p> </td> <td> <p>8679</p> </td> <td> <p>$628</p> </td> <td> <p>$290</p> </td> <td> <p>$494</p> </td> <td> <p>4.7</p> </td> <td> <p>$106</p> </td> </tr> <tr> <td> <p>Difference</p> </td> <td> <p>9.3%</p> </td> <td> <p>136%</p> </td> <td> <p>29%</p> </td> <td> <p>80%</p> </td> <td> <p>0.4%</p> </td> <td> <p>113%</p> </td> <td> <p>116%</p> </td> </tr> </tbody> </table>

Using the numbers supplied by Visa and MasterCard during their most recent earnings call, I have worked out an approximation of the average dollar volume and transaction volume per card. Visa has the most exposure, both with more cards and a larger transaction volume. Surprisingly, although MasterCard has about 57% fewer transactions on its cards than Visa, the average card spend is only $2 lower.  This discrepancy is explained  by looking at the average number of transactions and average dollar volumes - Visa is used for more transactions but with an average spend approximately half of that of MasterCard.

Revenue composition

<table> <tbody> <tr> <td> <p>US$ in Millions</p> </td> <td> <p>Service Revenues</p> </td> <td> <p>International Transactions</p> </td> <td> <p>Transaction Processing</p> </td> <td> <p>Other Revenues</p> </td> <td> <p>Q3 Total Revenue</p> </td> </tr> <tr> <td> <p>Visa</p> </td> <td> <p>1264 (38%)</p> </td> <td> <p>796 (24%)</p> </td> <td> <p>1062 (32%)</p> </td> <td> <p>172 (5%)</p> </td> <td> <p>3294</p> </td> </tr> <tr> <td> <p>MasterCard</p> </td> <td> <p>908 (35%)</p> </td> <td> <p>630 (24%)</p> </td> <td> <p>763 (29%)</p> </td> <td> <p>294 (11%)</p> </td> <td> <p>2595</p> </td> </tr> </tbody> </table>

Visa’s revenues show the benefits of the higher transaction count; with significantly higher revenues in both the transaction processing and service divisions.

On the other hand, the revenue composition highlights the strengths of MasterCard’s revenue. Although MasterCard has 57% fewer transactions than Visa, total Q3 revenue is only 21% less than that of Visa’s.

I am able to draw two conclusions from these figures:

1.  MasterCard must charge significantly more per transaction than Visa - resulting in higher free cash flow.

2.  MasterCard is a much more efficient company. Producing more revenue from fewer customers

This second point can be proven by comparing the profit margin between the two firms.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>Operating Margin</p> </td> <td> <p>Profit Margin</p> </td> </tr> <tr> <td> <p>MasterCard</p> </td> <td> <p>42%</p> </td> <td> <p>30.5%</p> </td> </tr> <tr> <td> <p>Visa</p> </td> <td> <p>21%</p> </td> <td> <p>20%</p> </td> </tr> </tbody> </table>

So far we can see that Visa has higher revenues and more transactions. However, MasterCard is the more efficient firm, with a higher dollar volume per transaction and a significantly larger worldwide exposure. So each firm has its own merits.

Which Stock To Buy?

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>Historic P/E</p> </td> <td> <p>Float Short</p> </td> <td> <p>Forward P/E</p> </td> <td> <p>EPS Growth Next Year</p> </td> <td> <p>EPS Growth 5-Yr Average</p> </td> <td> <p>PEG</p> </td> <td> <p>Yeild</p> </td> <td> <p>Cash Flow per Share</p> </td> </tr> <tr> <td> <p>MasterCard</p> </td> <td> <p>28</p> </td> <td> <p>1.4%</p> </td> <td> <p>18.9</p> </td> <td> <p>16.1%</p> </td> <td> <p>109%</p> </td> <td> <p>1.2</p> </td> <td> <p>0.25%</p> </td> <td> <p>$21</p> </td> </tr> <tr> <td> <p>Visa</p> </td> <td> <p>79</p> </td> <td> <p>1.7%</p> </td> <td> <p>17.8</p> </td> <td> <p>15.2%</p> </td> <td> <p>30%</p> </td> <td> <p>1.2</p> </td> <td> <p>0.9%</p> </td> <td> <p>$7.39</p> </td> </tr> </tbody> </table>

                                                                                                                                                                                    Right now, MasterCard looks cheaper historically, but Visa looks cheaper on forward earnings. Visa has a larger float short, but only marginally. MasterCard is forecast to grow around 1% faster than Visa next year, however, over a 5-Yr period MasterCard has grown three and a half times faster than Visa. MasterCard has a poor yield, but significantly stronger free cash flow per share.

MasterCard and Visa both have their merits. However, for worldwide growth and improved free cash flow, MasterCard is the winner.

RupertHargreav 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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