Which Credit Card Company Provides The Most Bang For Your Buck

Includes: AXP, DFS, MA, V
by: Bill Maurer

As we approach the holiday season, we realize that Americans do love their credit cards. Sometimes, the obsession is a little too much, and we realize that. But these companies are profit machines, and could be a great add to any portfolio. So let's try to figure out which one is the best, or at least which ones are better in certain respects.

Prices Visa MasterCard American Express Discover
Current Price $87.63 $329.82 $46.47 $23.88
52-week high $94.75 $361.94 $53.80 $27.92
52-week low $66.50 $215.00 $37.33 $16.12
Market Cap. $60.65B $41.91B $55.47B $13.03B
Dividend Yield 0.68% 0.18% 1.55% 1.01%
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As you can see from the chart, you are mostly investing in these stocks for their growth potential, not as a value play. American Express (NYSE:AXP) does offer a slightly higher dividend than the rest, but it's not tremendous. Most of these stocks are well off their 52 week highs, so you could make a good case for an entry point here. Although you may want to wait for the next market downturn and get them a little lower. Let's get into some heavy analysis now. We'll start with valuations.

Valuations V MA AXP DFS
P/E (2011 est. EPS) 17.67 18.60 11.71 6.42
P/E (2012 est. EPS) 15.37 15.82 11.20 7.88
Price/Sales (ttm) 6.94 7.12 2.00 2.67
Price/Book (mrq) 2.37 7.86 3.09 1.80
PEG (5-year) 0.92 0.94 1.01 0.70
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Overall, Discover Financial Services (NYSE:DFS) appears to be the cheapest, but I'm not too keen on that forward P/E being higher than the current one. It is extremely interesting that Visa (NYSE:V) and Mastercard (NYSE:MA) trade at much higher valuations, but a lot of people seem to like those stocks, and they are willing to pay these prices. I've never been a fan of American Express, but you could make a compelling valuation argument here. Not sure if you'll feel the same way after we look at some growth estimates for these companies.

Revenues/EPS V* MA AXP DFS*
Revs (2010) $8.06B $5.54B $27.82B $6.66B
Revs (2011 est.) $9.21B $6.58B $29.97B $6.98B
Revs (2012 est.) $10.13 $7.36B $32.13B $7.19B
EPS (2010) $4.01 $14.05 $3.35 $1.22
EPS (2011 est.) $4.96 $17.73 $3.97 $3.72
EPS (2012 est.) $5.70 $20.85 $4.15 $3.03
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*Note: Visa's fiscal year ends in September. Discover's ends in November. Others follow regular calendar year.

Now these numbers may even be low, as Visa and Mastercard just announced plans to raise debit card fees on small ticket purchases, which should migrate more purchases back to traditional credit cards. Mastercard offers the best revenue growth here for 2011 and 2012, followed by Visa, American Express, and Discover. The same trend is true for EPS growth, and we'll ignore the volatile movements of Discover's earnings for now. Based on these numbers, I like Mastercard, but as seen above, you will be paying for this growth.

Margins (ttm) V MA AXP DFS
Gross Margin 84.04% 100.00% 77.07% 100.00%
Operating Margin 58.38% 51.51% 20.92% 53.65%
Net Margin 39.72% 34.85% 16.63% 33.02%
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100% gross margin! Who doesn't like that? That is a great number, but only if you can translate it further down the income statement, and Mastercard and Discover have a little trouble there. I really like Visa here because their net margin is a lot higher than everyone else's, and their operating margin isn't too shabby either. Mastercard and Discover are in a close race for 2nd here.

Financials (mrq) V MA AXP DFS
Current Ratio 2.69 2.03 N/A N/A
Debt Ratio 24.38% 39.39% N/A N/A
Working Capital $6.0B $3.0B N/A N/A
Cash $6.5B $3.4B $23B $4.0B
Short Term Debt $478M None $4B $100M
Long Term Debt $22M None $61B $1.8B
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Unfortunately, American and Express don't fully break down their balance sheets, so I had trouble calculating a few numbers in this section. Discover has a large cash balance compared to its low market cap, but also holds a fair amount of debt. It's kinda nice that Visa and Mastercard have little to no debt, but that doesn't instantly make you a great company. You will just have other liabilities. I like Visa over Mastercard here for the first two ratios. I'm holding back judgment on the other two due to lack of financial clarity.

If you were to tell me that you were buying any of these stocks, I would say congratulations, you are making a great investment. I think any of these four would make a great addition to any portfolio. I would tend to favor Visa and Mastercard here because they offer the most growth potential going forward, despite a lofty valuation. Sometimes you have to pay for growth, and I'm willing to do that here. My favorite in the industry is Mastercard, but I don't see how you can go wrong with any of these.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.