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Introduction

One of the reasons why credit card processing companies such as Visa (V) and MasterCard (MA) have been so successful is that the consumer is rarely being charged for using the card and almost all of the cost is borne by the merchant and the issuing bank. With an increase in globalization and preference for paperless payments and a decrease in the number of currencies following the introduction of the Euro, the popularity of credit cards will only rise. Visa and MasterCard are two companies that are well positioned to benefit the most from these trends.

This article will explain why Visa and MasterCard shares offer an attractive investment opportunity. In addition, it will review the credit card companies' positions in the current economic environment and why it is advantageous for them. Finally, the article will try to show why technological innovations do not pose a significant threat to these credit card companies for the foreseeable future.

Valuation

MasterCard and Visa shares have been trading near $425 and $128 per share or near their 52-week highs of $467 and $132, respectively. While the share prices seem high, they trade at estimated 2012 price-to-earnings ratios of 19.5 and 21.2 for MasterCard and Visa, respectively (their 2013 projected price to earnings ratios are more attractive at 16.6 and 18.2, respectively). Both MasterCard and Visa offer a minimal dividend yield of 0.25% and 0.65%, respectively, and have relatively low betas or stock price volatility of 0.9 and 0.8, respectively. A high price-to-earnings ratio combined with low beta and minimal dividend yield imply a stable growth for these companies.

For comparison, shares of American Express (AXP) and Discover Financial Services (DFS) trade at 2012 price-to-earnings ratios of 13 and 9 and have dividend yields of 1.4% and 1.1%, respectively. While these valuations appear more attractive than those of MasterCard and Visa, these two competitors have expected long-term growth rates of about 11% compared to 19% for MasterCard and Visa. Also, American Express and Discover have more volatile share prices with betas of 1.8 and 1.4, respectively, making them riskier investments than MasterCard and Visa. In addition, American Express is more exposed to a slowdown in travel stemming from the economic problems that Europe is experiencing. A potential drag for Discover could be a lack of international growth and its expansion into banking services such as personal and student loans and mortgage origination, which is already a highly regulated and competitive space.

Economic Tailwinds

MasterCard and Visa are able to benefit from consumer and business recovery following the 2008-9 financial crisis. During the second quarter of 2012, MasterCard reported domestic gross dollar volume growth of 9% and international growth of 19% compared to the same quarter of 2011. Similarly, for the quarter ended June 30, 2012, Visa registered U.S. and international payments volume growth of 6.5% and 16.8%, respectively, compared to the same quarter in 2011. Clearly, MasterCard and Visa are able to benefit from an increase in electronic payment growth in developing markets as well as a sluggish domestic economic recovery.

Due to governmental quantitative easing in the U.S. and abroad, many economists and market participants expect inflation to increase in the near future. Even Japan is predicting an end to its long-term deflation in 2013. Since credit card fees are based on the purchase price, a rise in inflation would increase their revenues. Thus, MasterCard and Visa should be able to weather an inflationary period relatively well.

Threats With Opportunities

One of the major competitors to the credit card companies is eBay's (EBAY) PayPal and Isis, a mobile payment service created by AT&T (T), Verizon (VZ), and T-Mobile. While PayPal is a formidable competitor showing strong growth rates, it is part of eBay which competes with major retailers and is not well accepted by banks. Similarly, Isis attempted to create an independent payment infrastructure only to give up and partner with banks and credit card issuers such as MasterCard and Visa.

Other payment services such as Amazon.com Payments, Google Wallet, and the rumored Apple's iWallet for the new iPhone 5, in fact, all use and benefit the credit card issuers. Even the Square's application, which recently signed up Starbucks as a customer, has Visa as an early investor in the company. Overall, MasterCard and Visa have an established penetration with banks, merchants, consumers, and more recently governments. This ensures that for the near future, technology will most likely help MasterCard and Visa reach more customers and make their operations more efficient and secure.

Conclusion

MasterCard and Visa trade at valuations that are richer than those of their closest competitors (American Express and Discover). However, MasterCard and Visa shares offer lower volatility, higher expected growth rate, and better acceptance worldwide. While the economy has not been recovering as expected and is even slowing down in Europe, MasterCard and Visa are well positioned to benefit from increased demand for online shopping and paperless payments. Their businesses are also relatively immune to rising levels of inflation and interest rates. Finally, new technological innovations in online, mobile, and person to person payments, while disruptive for the payment industry, may benefit MasterCard and Visa by allowing them to reach more customers in new ways.

Source: 3 Reasons Why MasterCard And Visa Are Good Long-Term Investments