It has been a rough year for equity investors as fear of a European sovereign-debt meltdown have ravaged world markets. The S&P 500 is down 11% from its late-April highs and is in negative territory for the year. Financials and other economically-sensitive sectors have taken much greater losses, and European markets have experienced what could only be called a bloodbath.
Yet in spite of the volatility roiling the markets, Visa (NYSE:V) has pushed through to fresh 52-week highs and is within striking distance of new all-time highs above $97.00.
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Visa’s resiliency is somewhat ironic. So much of the recent market turmoil was due to political uncertainty, first in the United States with the debt ceiling fiasco and then in Europe when it appeared that Germany might not step up and come to Greece’s rescue. In Visa’s case, the political uncertainty that had been keeping a lid on credit-card stocks - the implementation of the Dodd-Frank Durbin Amendment - was finally resolved this summer.
With fears of the Fed’s fee cap no longer hanging over their heads like the Sword of Damocles, shares of both Visa and rival MasterCard (NYSE:MA) have performed as you might expect. While Visa is approaching a new all-time high, MasterCard surpassed its old high earlier this year and is up more than 50% year to date. I remain bullish on credit-card stocks in general and Visa in particular. If - as many fear - the United States slips again into recession, consumer spending will take a hit. But there are a couple important points to remember:
- Recession or not, the world is going cashless. Every year a larger percentage of transactions is done electronically, yet even in the United States fully 40% of all transactions are still done with cash or paper checks. So, even in an environment of stagnant retail sales growth, card usage should continue to grow, be it in the form of debit cards, credit cards or even pre-paid cards.
- Visa is not a “credit card stock,” per se. It’s a brand-management company that controls a sophisticated - and highly profitable - electronic toll road. Visa is not a bank and takes no credit risk. That is the job of the banks that issue cards branded with the Visa logo. Visa makes its money by charging banks service fees for the use of its Visa brand and its global electronic-processing network for credit and debit cards.
- Visa is what I consider an “Emerging Markets Lite” investment. The company already gets 40% of its revenues from overseas, most of which are from the fast-growth markets of Asia and Latin America. Visa has a stated objective of having more than half of its revenue from overseas by 2015, and all indications are that the company will reach this goal. The rise of the new emerging market middle class is real, and Visa is uniquely positioned to profit from this trend.
Given the outsized profits to be earned from the “Plastic Revolution,” it’s not surprising to see new competition nipping at Visa and MasterCard’s heels. EBay’s (NASDAQ:EBAY) PayPal recently made a splash by expanding beyond its core Internet payments business into physical “bricks and mortar” retail.
PayPal account holders will soon be able to pay using their mobile phone and a pin number, and they can already use PayPal-issued cards that work in traditional point-of-sale terminals. It remains to be seen what kind of market share PayPal will be able to grab, but I remain somewhat skeptical. PayPal does not replace your traditional bank account or credit card; it simply acts as a middle man between your financial institution and the merchant. And while PayPal is indeed popular, it lacks many of the account security features of traditional card issuers.
Furthermore, many of the innovations attracting the most attention - such as paying with your mobile phone - can be copied by banks. In any event, the market for electronic payments is large enough and has enough growth potential to accommodate newbies like PayPal. And in the meantime, Visa should continue to hum along nicely. Use any corrections as an opportunity to accumulate more shares.
Disclosure: I am long V.
Additional disclosure: Visa is a recommendation of the Sizemore Investment Letter.