Will Credit Card Companies Deliver

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Wednesday two of the largest companies that revolutionized the use of credit cards reported their earnings. MasterCard (NYSE: MA) posted a third-quarter profit that beat analysts’ estimates as consumer spending in the United States increased and the firm’s tax rate fell. The strengthening of the economy and the reversal of previously recorded tax reserves helped Visa (NYSE: V) profits to rise by 89%. Discover Financial Services (NYSE: DFS) also reported its tenth straight quarter beating analysts’ estimates. A positive earnings surprise has been the reason of revision of estimates by analysts.

The Numbers

MasterCard’s net income soared by 7.7% to $772 million from last year’s figure of $717 million. Net revenue increased by 6% to $1.92 billion, while operating expenses have increased 5% to $854 million. The revenue increased, as currency adjusted global spending on MasterCard and Maestro cards climbed 12% to $676 billion. Credit-card purchases rose by 3.2% in the United States and 11% worldwide. The effective tax rates for the company has decreased to 27.6% from 30.5%, as the firm benefitted from a U.S. law that allows taxing income from exported software at a lower rate.

Visa reported its revenue at $2.73 billion, rising by 14.6% from the same period last year. The company's net income for the quarter rose by 89% to $1.66 billion compared to last year. Total net operating revenue rose 15% to $2.7 billion, while the payment volumes grew by 6% to $1 trillion. The reversal of $627 million of tax reserves helped in boosting the net profits. Visa’s business grew mainly outside the U.S., in Asia and Pacific.

The Prospects

MasterCard and Visa’s business growth has been mainly outside the United States led by the increase in payment volumes. Consumer’s preference for cards and digital payments instead of cash is helping both companies add new business. Improved consumer confidence resulting in increased consumer spending and newer federal rules on transaction processing has helped business prosper.

MasterCard expects it can double its market share in the Nordic and Baltic regions for the next three years, further extending their presence in the well performing markets. The deals with travel company Thomas Cook to provide foreign exchange prepaid cards and with ICICI Bank and Western Union Co, for a reloadable prepaid card in India should add lot of business in the coming quarters. MasterCard is buying back shares an additional 255,000 shares this month alone for $119 million, and has $1.1 billion left to spend under the buyback program.

Visa’s continued investment in new technologies should help its financial clients expand their businesses and add incremental value to the merchant community. The company expects extraordinary opportunity for growth in the payments industry. Visa has also repurchased stock and has further announced on Wednesday, that its directors have authorized a new $1.5 billion share repurchase program. Buybacks are an important source of improving earnings for the company. The company has increased the dividend as the company moves closer to resolving a seven-year legal battle with merchants over credit-card “swipe” fees.

MasterCard is trying to adapt itself to the changing trends like mobile payment system through its deal with T-Mobile. Discover Financial Services is also linked to PayPal and is competing with MasterCard in the mobile payment trend. Discover’s deal with PayPal is sure to deliver good returns in the present while the future long-term prospects are not certain.

Discover Financial has also seen growth in card sales and loan receivables in its most recent quarter. The company’s efforts to diversify have started reaping benefits.  Discover home loans, which started earlier this year has originated more than $1 billion mortgages in just over three months. Discover has entered agreements with Industrial and Commercial Bank of China and Russian Standard Bank to promote Discover branded cards and expand its global presence.

Final Words

Visa has delivered very consistent performance and is opting for secured returns, limiting it from fully embracing the new trends in the industry. The company may be sidelined by the market’s shift to mobile payment. The returns from shifting to mobile payments in the future are worth overlooking the risks involved in it. I am not sure how well the investors will respond to the conservative approach of Visa, though strong growth prospects still makes it a lucrative option to be in an investor’s portfolio.

MasterCard’s present business strategy is very sustainable. The deal with T-Mobile will benefit MasterCard to get itself introduced to not only 93 million European mobile subscribers, but to a global market of mobile payments. MasterCard’s strategy will help it capture more market in the long run. Therefore, I recommend a strong BUY. Discover Financial is also a good investment option but with a short-term horizon of six to eight months as the outcomes of its agreements the banks and PayPal cannot be projected accurately at the moment. 

tarunbachhawat has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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