Monday, February 4, 2008

Visa (V) IPO Seeks Mastercard (MA) Riches

We've talked about this in the past (click here for previous posts on Visa), but as we get closer to the IPO date, just want to keep the news flow in front of you. This is definitely a name (if this were a real fund) I'd be asking to get IPO shares in the initial offering. With that said, since Mastercard has established a "fair value", the upside surprise in Visa won't be anything akin to the huge run of Mastercard since IPO, since the stock will be more accurately valued from day 1.

Re: Mastercard - again my thesis, now in the minority, is that a slowing economy and stressed consumer, will in fact HELP (not HURT) the company. People will be desperate to pay for day to day things any way possible. If they default down the line? Oh well, that's not on Mastercard's books. Again it's a minority view but I think down the road the skeptical analyst community will come around to it as they see this play out. And the refinancing boom inspired by Helicopter Ben? Even better. This allows the house ATM to come back into play for 2004 and earlier homes - move credit card debt to home equity by refinancing and bada boom! What do you have? A credit card whose balance is back down to $0. And then you can play the game all over again. Windfall!

  • MasterCard(MA) once again reported blowout earnings last week, bolstering predictions of a smooth ride for the much-anticipated IPO for its rival Visa.
  • Observers say Visa could go public sometime in the second half of the year, despite some market chatter that the offering date could be put on hold or that the pricing could be lower than observers initially hoped for, due to the general malaise in market conditions and concerns about the stalling consumer.
  • But while consumers seem to be struggling with payments on everything from cars to mortgages these days, it's clear that their use of plastic has not diminished -- and likely won't.
  • "For investors, this is the perfect time to be considering purchasing this stock," says David Menlow, president of IPO Financial Network, based in Milburn, N.J. "I'm not concerned the talks of consumer problems is going to be a detriment to the market. If you look at [consumers'] tendency to live on their credit cards when times get rough that may in fact be an offset to some degree. I don't believe that people are going to want to miss another MasterCard."
  • Visa plans to list the stock under the symbol "V" on the New York Stock Exchange. While the company declined to comment for this story and few details have been made public so far regarding the initial public offering, Visa expects to raise up to $10 billion, according to the preliminary registration statement filed with the Securities and Exchange Commission.
  • "People like the convenience of the cards," Gillen adds. "Transactions are moving downstream a little bit. People are using [cards] for $5 transactions. What the major payment card brands are trying to do is to go deeper into transaction sizes to get smaller ticket payments -- where cash is still used today -- and convert that into cards."
  • More importantly though, neither company keeps consumer debt on their balance sheets, as opposed to rival American Express(AXP - Cramer's Take - Stockpickr), which was forced to set aside a large provision for loan losses last quarter as consumers began having trouble paying not only their home loans but their credit card bills and auto loans.
  • MasterCard's "magnitude of EPS upside was a positive surprise to the market, as was the realization that with these numbers, there really are no signs that a slowing U.S. consumer is impacting the model negatively at this time," writes Christopher Mammone, an analyst at Deutsche Bank. "We think the shares could continue to outperform as Street numbers are likely to go materially higher after this print, and so we are raising our price target to $250."
  • CEO Robert Selander acknowledged during a conference call that while revenue growth will likely slow this year, "a mix shift in consumer spending" is actually helping the business. "Over the past several months, consumers have moved away from discretionary items such as jewelry, full-service restaurants and home furnishings toward everyday purchases including gasoline, grocery and personal health care items," Selander said. "This movement to everyday purchases aligns well with where MasterCard is broadly positioned in consumers' wallets. For us, the shift in spending patterns has translated into higher fourth quarter."

I believe the CEO, in that last point, is confirming my long held thesis. One day analysts will come around to this view too.

Long Mastercard in fund; no personal position

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