Why Visa And MasterCard Are Still Good Buys

Includes: AXP, DFS, MA, V
by: Benjamin Goldman

Visa (NYSE:V) and MasterCard (NYSE:MA) have quietly been two of the best performers in the stock market. While the S&P 500 is down about 1 percent over the last five years, Visa's shares have more than doubled and MasterCard's have more than tripled. As e-commerce and mobile payments continue to grow and grow as a percentage of consumer sales, so do credit card companies.

Both Visa and MasterCard are payments networks, and the bulk of their revenue comes from transaction fees, which average about 0.09 percent of each transaction. Interest income and default risk is held by their global partners. Visa was founded in 1970 and MasterCard was founded in 1966, but both companies are just beginning to achieve their maximum earnings potential. Analysts expect Visa's earnings to increase by 19.6 percent per year over the next five years and MasterCard's earnings to increase by 19.4 percent per year over the same time period. Both expected growth rates are actually lower than their earnings growth over the last 5 years, as Visa's earnings have grown by 28.9 percent per year and MasterCard's have grown by 31.3 percent per year.

The past growth came from strong growth in e-commerce, where credit cards are essentially the only form of payment, and an expansion of companies that accept credit cards, which is led by restaurants and mom and pop retailers. The future earnings growth is expected to stem mostly from the expansion of mobile payments and credit spending internationally.

The real question for investors isn't a matter of whether or not the two global payments companies will continue to expand, it's whether or not the two companies' stock prices have any room left for growth. The answer, for now, is yes. Visa has a December 2012 forward P/E ratio of 21.7 and MasterCard's forward P/E is 20.46. With the current P/E ratio of the S&P 500 hovering around 16.5 with 10 percent per annum growth expectations, this is a great value for investors. Many companies with similar growth expectations have P/E ratios in the 40's. Visa's and MasterCard's growth expectations are also more easily achievable than many small cap companies with similar growth prospects. Both companies operate in almost every country on Earth and have an established business footprint.

There are a few reasons why I would recommend Visa and MasterCard over their competitors American Express (NYSE:AXP) and Discover (NYSE:DFS). In addition to being a payments network, American Express also plays the role of the banks in their credit transactions. Financial institutions' credit card businesses are not as attractive as the payments networks right now and the American Express network is not as successful as Visa's or MasterCard's. Discover, as a smaller alternative, has not experienced the same growth as Visa or MasterCard and its earnings per share is actually supposed to decrease from 2012 to 2013. However, the stock is priced appropriately and may be an okay value buy.

In conclusion, I believe that Visa and MasterCard are strong buys for those who want to be long on the development of mobile payments, international commerce, and the diminishing frequency of cash transactions. E-commerce on a company to company basis can be very risky for individual investors as companies can go out of business overnight, but Visa and MasterCard are solid buys on their own since their payment networks represent such a large portion of the total market. They are also good stocks for those who want some exposure to the financial industry, but don't like volatility in their portfolios. Going long on Visa and MasterCard is a safe, proven bet and gives exposure to industries that are generally risky and uncertain.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in V over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.