Visa Vs. MasterCard: Which Is The Better Buy?

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 |  Includes: MA, V
by: Karin Hernandez

With all of the discussion lately about new payment methodologies, and predictions that the credit card will soon go the way of the dinosaur, I started thinking about the credit-card processing category. Is it really on the way out? Seems unlikely to me. So between the big two, Visa Inc. (NYSE:V) and MasterCard Incorporated (NYSE:MA), the question is: Which is the better buy?

In my analysis, I tend to rely heavily on analyst opinion and estimates. I figure they have been studying the stock for a while and probably have a better handle on the numbers than I do. I do look at current news, as well, but I like to lean more on the numbers to provide an objective recommendation.

Visa is currently trading at about $129, just off its 52-week high of $132.58 reached in early August. It has a PE of 21.0 and pays a 0.7% dividend. The current analyst rating is a 1.9 (1.0 = Strong Buy, 5.0 = Sell) with a mean target price of $138.46, for a potential gain of 7%. There are 12 Strong Buy recommendations, 15 Buys, 6 Holds, and 2 Underperforms.

The consensus estimate for fiscal-year-end September 2012 is $6.14, 23% higher than actual 2011 earnings of $4.99. The estimate for fiscal year-end 2013 is $7.15, 16% higher than 2012.

The stock is up 28% year-to-date, and up 61% from this time last year. The current estimated annual growth rate for the next 5 years is 19.34%, compared to an industry average of 12.64% and a sector average of 10.02%.

Mastercard is trading at approximately $429 per share, down 8% from its 52-week high reached in May. It has a PE of 25.6 and pays a 0.3% dividend. Currently analysts rate it a 1.9 (12 Strong Buys, 14 Buys, 8 Holds, and 1 Underperform) with a mean target price of $487.63, for a 14% potential gain.

Mastercard's year-end 2012 consensus earnings estimate is $21.82, 17% higher than actual 2011 earnings. Its estimate for year-end 2013 is $25.63, 17% higher than 2012.

The stock is up 15% since the beginning of 2012, and up 41% from a year ago. The current 5-year annual growth is estimated at 19.36% vs the S&P at 10.17%.

Both Visa and Mastercard look incredibly well positioned going into the next era of mobile payments. Regardless of the form that the transaction takes (dongle, cell phone, other methods yet-to-be-invented), the payment must be processed through an intermediary between the merchant bank and the customer bank. Both Visa and Mastercard have the technology in place to facilitate these transactions for the future, and I don't see them as being replaced any time soon.

Eventually, however, I go back to the numbers. With Visa's current and fiscal-year-end 2013 earnings estimate, I see a stock price of $150, or potential upside of 16%. Mastercard's PE and earnings estimate leads me to a stock price of $650, for 53% upside.

While both stocks meet my 15% threshold for potential gains, I believe that Mastercard offers far greater upside. Buy Mastercard.

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