Visa Power - Go Get It

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

I never really bothered to notice if I use a Visa (NYSE: V) or MasterCard (NYSE: MA) while buying something with my credit card. It has never made any difference to me, as I had to pay for what I purchased. But it does make a difference to these two big payments technology companies. After all, as more people use their cards, the companies receive more revenue.

Visa posted Q1 2013 results, beating analyst estimates slightly on revenues and more on earnings. For the quarter, revenue was up 12% year over year to $2.85 billion, while GAAP EPS came in at $1.93, 26% higher than $1.53 a year ago. This includes a one time tax benefit of $0.11. Net income also surged 26% to $1.29 billion YoY.

Visa makes money by processing card transactions. During the quarter, transactions processed over its network increased 4% to 14.2 billion. Its credit and debit card transactions were up 21% in the overseas market, while there was a decline of 4% in debit transactions in the U.S. With the introduction of new products such as, an electronic wallet, the company is increasing its presence in the payments processing business. At the end of 2012, the electronic wallet was being used at 31 merchant sites, and presently the number stands at over 150.

Going forward, Visa has raised its free cash flow guidance to $6 billion. Moreover, it has authorized $1.75 billion in share repurchases. Including previous buyback authorization in Oct. 2012, Visa now has $2.9 billion available for share repurchase. With that much cash in hand, we can expect some major acquisitions or even an increase in dividends by the company.

A similar card game

MasterCard also posted Q4 results with revenue of $1.9 billion, in line with the consensus estimates. Earnings came in at $4.86 per share, up 21% YoY. MasterCard has been consistently performing well, which is clearly evident looking at its growth over the last two years. The stock price has doubled in two years, and more recently it has announced it will double its quarterly dividend from $0.30 to $0.60. It has also approved a $2 billion buyback program.

MasterCard has entered into a strategic partnership with Mu Sigma, an analytics firm. These companies plan to deliver new analytic products that will help their clients gain more customers and increase customer loyalty. Going by the size of the Big Data analytics market, which is around $5 billion, there is ample room to grow.

The one thing to worry about is MasterCard’s exposure in Europe. If the conditions in Europe don’t improve, we will see growing pressure on earnings. But, if things go right there, then MasterCard can benefit immensely from its European footprint.  Meanwhile, the payments processing business only seems to get better as the trend towards cashless payments grow.

Discover an Express-way

American Express (NYSE: AXP) and Discover Financial Services (NYSE: DFS) are two other credit card companies in the payments process business. The scale of their operations is not as large as the other two, but these companies will also benefit from the move away from cash. When talking in terms of valuation, these two look less expensive than Visa and MasterCard. American Express and Discover Financial have trailing P/E's of 16 and 9 times, respectively, while Visa and MasterCard are trading at 44 and 24 times, respectively.

The fourth quarter results for American Express were very disappointing. The company is trying to expand into mobile and savings accounts, and with the new partnership with Wal-Mart it hopes to capture more of the prepaid market. American Express has also introduced the first ‘pay-by-tweet’ service on Twitter, allowing cardholders to buy products by putting hashtags in their tweets that correspond to deals offered by AmEx. This move will increase its popularity significantly, and if the partnership is exclusive (the details of the deal aren’t out yet), American Express will likely benefit immensely.

Discover Financial has become one of the largest card issuers in the U.S. and still has room to grow, but the growth could be slowed as a result of higher advertising and marketing expenses coupled with competitive pressure from other credit card companies. The larger scale of operations and resources of competitors make them more attractive to customers, as they are in a better position to offer incentives and reward programs. If you already own shares of Discover then it’s a keep, but I wouldn’t recommend a buy as I see more opportunities in the bigger players.

Let’s Pick

There is huge potential for electronic payments to grow given the fact that almost 80% of payments worldwide are made in cash. A word of caution for some investors here: Visa is trading at P/E multiple of 44 times, way over the industry average of 24 times. This might look to be an expensive deal, but given the potential to grow this company could be a good long term bet.

MasterCard also trades near all time high levels currently, and like Visa, this company has a high growth rate. There are some things money can’t buy, but at these levels you definitely need some to buy shares of MasterCard. I would continue to hold but not buy it at these levels. Rather, at a forward P/E of 11, 20% cash flow yield (ttm), and ROE of around 20% (based on FY 2012), I would prefer American Express at current prices.

shaleenlohia 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!

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