Sometimes the most obvious investment opportunities can be right in front of you or right in your wallet. The first thing you probably notice when opening up your wallet is an assortment of credit/debit cards. Amongst your cards you will either have a logo of Visa (V), MasterCard (MA), American Express (AXP), or Discover Financial Services (DFS). Amongst these companies how do you know which one to invest in since on the surface they appear to be identical and function in a similar manner?
AXP and DFS are bank holding companies that extend credit. V and MA do not issue cards, extend credit or set rates and fees for consumers. They however, allow their bank customers to offer consumers method of payment choices. This difference in business model was exploited during the financial crisis. AXP and DFS were forced to take write downs on their soured loans, while V and MA simply just processed transactions and did not have to worry about taking any write downs. AXP and DFS have started to witness an improving business environment as evident in the improvement in return on equity as provisions for loan losses have fallen sharply in the past year, reflecting the increase in profits. Delinquency rates for credit card loans over 30 days have declined 2.22% and credit card net charge-off rates declined 3.07 % for DFS and for AMEX 1.4% and 2.3% respectively. Credit still appears to be tight and economic growth pretty stagnant and with eurozone fears coming back into the market I believe AXP and DFS will still start to significantly underperform compared with V and MA.
V and MA will continue their trend upward in coming months as their global dominance in the credit and debit card space tends to far exceed AMX and DFS. This global presence will also allow a diversification of revenue stream, which will help these firms weather any global market uncertainty. Unlike many other companies these two are expected to grow revenue in the double digits in the coming years.
V | MA | AXP | DFS | |
Revenue Growth |
Of these two best in breed how do you know which one to buy? If you look at the charts over the past year they closely resembled one another and I see this trend continuing.
For years, the way consumers and businesses pay for goods and services has transformed from a cash society to a plastic society. This transition is not close to being over and instead it is starting to pick up steam. As emerging markets are coming on board and developed nations move into mobile payment applications this trend will bode well for V and MA and help to keep their growth in the double digits in the coming years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
