We believe that Visa (V), MasterCard (MA) and American Express (AXP) have all positioned themselves well to ride the secular change in the global payments industry. The encouraging secular shift, and the improvement in U.S. spending volumes, has led these three companies to actively pursue alternative banking channels. Looking at the tremendous growth potential of these companies, we recommend our readers to long Visa, MasterCard and American Express Company.
The global payments industry has experienced tremendous changes over the past few years, leading to a gradual erosion of payments through checks and cash. Until the late 1950s, around 95% of consumers made payments through cash or checks. With the introduction of the magnetic strip, the percentage of cash and check payments reduced to 55% by the early 1980s. In the late 1990s, only 30% of checking accounts were issued debit cards. Consumers are moving toward convenient methods of transacting. Now every account has an ATM attached to it. Every household has around 13 to 15 credit cards, which has led to saturation in the market. Credit card issuers are using extensive rewards to get consumers to use one card over the other. Today, the secular change that the payments industry is experiencing, is leading consumers toward a more convenient and secure means of transaction though contactless capabilities. Contactless methods of payments will save consumers an extra trip to their banks or ATMs to withdraw cash. It is anticipated that this secular change will bring down the volume of payments being made in cash and checks to 15% of the entire payments in the next decade or so.
Spending Volume Growth
Credit spending volumes in the U.S. are on the rise. For the months of June and July, year-over-year growth in spending volumes increased 4.8% and 7.4%, respectively, while the YoY spending volumes through checks declined 7.5% and 4.4%, respectively. According to the latest figures released by First Data Corporation in August, same-store spending through PIN debit increased the most; 9.3% over the previous year's August, followed by Signature debit at 7.9%, and a 5.4% increase in spending through credit cards. Compared with this, payments made through checks during the month of August this year declined 3.2% when compared with August last year. This trend is expected to continue in the future. Going forward, global payments through Near Field Technology (NFC)-equipped mobiles are expected to reach $75 billion by 2013.
The best way to play this secular shift in the payments industry is to long those global payments technology companies that have well positioned themselves to benefit from this aforementioned change. Among them are Visa , MasterCard and America Express Company . All three have plans to move to an EMV chip card-based infrastructure, which will provide safer and faster transactions through contactless, remote and mobile payments channels.
Visa remains the market leader in the global payments industry. The company holds approximately 50% of the market share in terms of credit cards issued and in circulation. The latest figures reported by the company in August are very encouraging and unexpected for analysts. U.S. credit volumes for Visa increased by 12% MoM. U.S. payments volumes for Visa increased 2%, while cross-border volumes increased 13%. This was against the 7% growth in U.S. credit volumes for the month of July; U.S. payments volume decreased by 1% during the same month. July cross-border volume surged 9%. Much of the growth in the coming quarters will be associated to its cross-border activities.
The second-biggest card network company with a market share of 33.3%, MasterCard , has unveiled its new digital range of authorization and submission solutions; the Mobile MasterCard PayPass User Interface Software Development Kits for the Android and BlackBerry. This is one step ahead toward the implementation of mobile payments. The new solution will help the company reach its third-party processors, point-of-sale manufacturers, gateways and merchants. The solution will also complement well with payments through mobile technology using Near Field Technology . Over 70 models of the latest smartphone manufacturers are said to be compatible with MasterCard Mobile PayPass. Going forward, MasterCard will particularly benefit from ease of use and the time saving nature of the service provided through its MasterCard Mobile PayPass solution. Solutions like these will enhance MasterCard's competitive advantage and contribute to long-term growth.
American Express Company
Compared with Visa and MasterCard, American Express Company has a small market share with respect to the number of cards issued by the company. The company holds an 8% market share. The company was the first to develop a Payment Software Development Kit (SDK) last December. AXP has a history of reporting positive surprises. The company reported its second-quarter performance, which was 7% above the consensus expectations of analysts. The company reported $1.15 in earnings per share, beating estimates of $1.1. The turnover that the company generated during the second quarter of the current year surged by 4.6% over the same quarter of the previous year. Year-end consensus estimates for earnings per share of fiscal year 2012 are $4.39.
The stocks of Visa, MasterCard and American Express have seen significant appreciation since the beginning of the year, with YTD performances of 32%, 22% and 24%, respectively. The secular shift in the payments industry has led the stocks of Visa and MasterCard to currently trade in proximity to their 52-weeks highs.
For the purpose of relative valuations, we will compare Visa with MasterCard. While American Express Company will be compared with Discovery Financials (DFS).
Compared with MA's P/E of 17x, Visa has P/E of 19x. Slightly high valuations for Visa's stock are justified by the expected growth in the company. Approximately 20% growth in earnings for the company is expected in the coming 5 years (per annum), while it has already demonstrated 29% growth over the previous 5 years.
American Express Company trades at P/E of 14x, against 9x for Discovery Financial Services. American Express Company's bottom line is expected to grow by 12% per annum over the next 5 years. It has already demonstrated a growth of 24% per annum over the past 5 years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.