Credit Card Issuers Make Great Long-Term Holdings

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 |  Includes: AXP, DFS, MA, V
by: Nowacki Asset Management

Card issuers have been getting attention in the financial media in recent weeks because of Berkshire Hathaway's (NYSE:BRK.A) recent purchases of Visa (NYSE:V) and MasterCard (NYSE:MA). These were likely the work of Ted Weschler and Todd Combs, not Buffett, but receive a lot of attention nevertheless. Buffett is also a fan of card issuers, and first bought shares in American Express (NYSE:AXP) in 1964. Berkshire still has a 13% stake in the company.

With a growing number of consumers using debit and credit cards for in-store and online sales, card issuers have favorable long-term prospects. The big four - Visa, MasterCard, Amex, and Discover (NYSE:DFS) - in the industry account for nearly all card transactions in the U.S. Every long-term investor should be familiar with these four companies.

Below is a snap shot of each company, displaying EPS (excluding non-recurring gains/losses), revenue per share, and return on equity. Visa and MasterCard are growing revenues and profits at the fastest pace, but they are also selling at high P/Es. Discover looks cheap on a P/E basis, but is expected to have difficulty growing earnings this year.

These are attractive entry points to invest into American Express or Discover as long-term holdings. Visa and MasterCard have high expectations from investors, hence the high P/Es. Investors might want to wait for a pullback before investing into Visa or MasterCard.

American Express

American Express was first established in 1850 as an express delivery company by the same founders as Wells Fargo (NYSE:WFC). Today it generates more than $30 billion in annual revenue. It is the largest and most diversified among the Big Four.

Year EPS Revenue Per Share Return on Equity
2001 1.28 16.97 14.3%
2002 2.01 18.24 19.3%
2003 2.31 20.14 19.6%
2004 2.74 23.31 21.9%
2005 2.3 19.55 27.4%
2006 2.82 22.63 33.1%
2007 3.29 23.95 35.8%
2008 2.33 24.45 22.8%
2009 1.54 20.57 14.8%
2010 3.35 23.24 25.0%
2011 4.08 25.74 26.0%
Click to enlarge

Current Share Price: $53

Price/Earnings: 13

MasterCard

MasterCard generates about $7 billion in annual revenue. It is the fastest-growing among the Big Four and generates the highest return on equity.

Year EPS Revenue Per Share Return on Equity
2004 1.76 19.21 24.4%
2005 1.98 21.76 22.8%
2006 3.37 24.64 18.8%
2007 8.00 30.99 33.4%
2008 9.01 38.62 56.7%
2009 11.16 39.29 39.5%
2010 14.05 42.32 34.0%
2011 18.70 52.45 39.5%
Click to enlarge

Current Share Price: $395

Price/Earnings: 21

Discover Financial Services

Discover generates about $7 billion in annual revenue, the same as MasterCard. However, MasterCard is growing at a much faster pace.

Year EPS Revenue Per Share Return on Equity
2007 1.75 10.58 15.0%
2008 1.10 10.05 8.9%
2009 0.10 12.39 0.6%
2010 1.22 12.59 11.8%
2011 4.06 13.36 27.0%
Click to enlarge

Current Share Price: $29.60

Price/Earnings: 7.3

Visa

Visa generates over $9 billion in annual revenue and generates roughly 38% of the credit card transactions and 60% of debit card transactions in the U.S.

Year EPS Revenue Per Share Return on Equity
2008 2.25 8.08 8.0%
2009 2.92 9.12 9.5%
2010 3.91 9.64 11.9%
2011 4.99 11.3 13.8%
Click to enlarge

Current Share Price: $115

Price/Earnings: 23

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Clients of my firm own Berkshire Hathaway and Wells Fargo.