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Back during my teen years, I would read every book I could get my hands on about Buffett and Graham. And of course if you know anything about Buffett’s buying history, then you know the story of why he chose to gobble up as much Coca-Cola (KO) stock as he could. To most people at the time, the market for Coke seemed completely saturated. Everyone in America was drinking it! However Buffett saw beyond that; aside from its brand, “moat” and solid fundamentals, Buffett realized there were still untapped growth opportunities internationally.

Today, I can’t help but notice some of the striking similarities when it comes to Visa (V) and MasterCard (MA). Just like Coca-Cola, they are cash cows with solid fundamentals and have a high barrier to entry (their moat is deep). But most impressive is their limited saturation in the emerging markets, which are just now undergoing the transition from cash to credit cards.

Let’s take a look at a few of their key stats as of February 22, 2011:

Visa MasterCard
Marketcap: 52.57B
Trailing P/E: 17.03
Forward P/E: 13.12
PEG (5 yr expected): 0.83
Profit margin: 37%
Market Cap: 32.38B
Trailing P/E: 17.61
Forward P/E: 12.67
PEG (5 yr expected): 0.75
Profit margin: 33.33%

Lately both of these stocks have been battered: First from the recession (which happened not long after their IPOs) and then from all the talk about the credit and debit card reforms. How much will those fee crackdowns hurt these companies? That is yet to be determined, but it is clear that Wall Street has already priced these stocks as if the absolute worst, doomsday fee reform scenario was going to happen.

Right now only around 40% of Visa’s revenue comes from overseas, yet that is where 60% of the growth from last quarter came from. By the looks of this chart below, it’s easy to understand why:

[Click to enlarge]

Visa YOY Growth

Visa YOY Growth - Source: Visa.com

On the other hand, more than half of MasterCard’s revenue comes from overseas, but its international growth closely mimics Visa's.

Lower risk than banks?

We all know what happened to the banking industry during the recession, but Visa and MasterCard were relatively unscathed. Why? Because all they do is process payments; they don’t actually issue cards or extend credit. Taking a cut from each transaction -- but not enduring the risk associated with extending credit -- doesn’t sound like a bad deal, does it?

Conclusion

Although American Express (AXP) and Discover (DFS) are commonly accepted cards in the United States, when it comes to most developing countries, Visa and MasterCard practically have monopolies. So not only do they enjoy an international stronghold with a strong barrier to entry, but they are also riding two powerful trends:

  1. The switch from paper currency to debit/credit cards.
  2. Massive growth opportunities in developing markets.

Taking all these points into consideration, I strongly believe these are two credit card companies that are worth researching for your portfolio.

Source: Visa and MasterCard: Credit Card Plays Worth a Look?