Monday, March 30, 2009

Barron's: The Pleasure of Plastic - Mastercard (MA) & Visa (V)

I am going to attempt to mix in some talk about specific companies again like we used to do, before everything turned into government, bailouts, economics, and bailouts. Did I mention bailouts?

Below is a mention of one of the best business models on Earth - that of Mastercard (MA) and Visa (V). Visa (V) is probably a bit better business based on its dominance in debit - and better international reach; but since Mastercard came public first and I've had good results with it - it has generally been my choice in the space. While there are some headwinds due to weak global economy in the short run, over the very long run as we move away from a cash based society and to plastic (worldwide) both should do well. I usually don't deal with such high market capitalization stocks but these names have as much growth as many stocks in the small and mid cap area. The article focuses on a misperception many people unfamiliar with their businesses seem to have.

Via Barron's
  • IT IS UNCOMMON WHEN the chief executive of a company with a $50 billion market value and a globally ubiquitous brand feels compelled to explain to investors the rudiments of its business. Yet this is the position Joe Saunders, CEO of Visa, sometimes finds himself in. The first slide of an investor presentation given by the company last month states "What we are," which is the "largest payments-network company in the world." As for "what we are not," that includes "credit-card issuer, lender, exposed to consumer-credit risk."
  • Persistent misapprehensions about Visa's (ticker: V) business, a year after the company completed the largest-ever initial stock offering in the U.S., have created an opportunity for investors seeking a financially stable mega-cap growth stock as a core holding.
  • Visa brands debit and credit cards issued by banks, and earns fees on payments that move over its proprietary network. As such, it stands in the vanguard of a burgeoning secular trend: the use of plastic for everyday and big-ticket transactions.
  • U.S. payments via debit card, in which the money is drawn directly from a purchaser's bank account, grew at an 18% annual rate between 2002 and 2007, according to McKinsey. Even though that pace is expected to slow to about 9% through 2012, the public's increasing reliance on cards of both sorts could provide a powerful lift to Visa's earnings and shares, which trade around $55.50. Some fans think the stock could trade up to the $70s, even in a difficult economy.
  • Visa has about 75% of the U.S. debit-card market, compared with 25% for MasterCard International (MA), its principal global competitor. While the rivalry between them is spirited, they jointly compete against a bigger foe: cash and checks. In the U.S., cash is used in 57% of transactions, and most countries are even more cash-centered. (that is all future upside for these companies)
  • Plastic's long-running encroachment on cash and check usage could create an attractive tailwind for Visa and MasterCard for years to come. With pretax profit margins exceeding 40%, steady top-line growth easily translates for both into earnings-growth rates exceeding 15%.
  • Visa has some sensitivity to consumer-spending activity, but even after the Sept. 11, 2001, terrorist attacks, when the consumer largely froze, revenue grew at a high-single-digit rate. In 2008's fourth quarter, when U.S. consumers snapped their wallets shut, San Francisco-based Visa posted double-digit top-line growth. A planned price increase will help boost revenue this year, while lapping last year's results, hurt by high gasoline prices, will lead to better comparisons.
  • Visa trades at 20 times 2009 forecasts of $2.70 a share for the fiscal year ending in September. The company posted a profit of $1.7 billion, or $2.25 a share, in fiscal 2008, on total revenue of $6.26 billion. The stock's multiple may appear rich relative to the Standard & Poor's 500, which trades at less than 14 times future earnings. Yet Visa's profit, based on its guidance and analysts' forecasts, will rise by almost 20%, a rare distinction in a growth-starved market. (probably too aggresive in this environment but still should be able to do 15%+)
  • MasterCard is more modestly valued at 16 times calendar 2009 forecasts, and is attractive as an investment as well. The valuation discount is due to Visa's greater exposure to debit, and the continued overhang of some merchant-pricing litigation involving MasterCard. Visa has cut a deal that shifts this liability to the issuing banks.
  • Bill Sheedy, Visa's president for North America, notes the business "isn't very capital intensive. The main costs are marketing the brand and running the network."
[Jan 16, 2009: Mastercard, Visa Weak as Democrats Look to Move Up New Regulations]
[Nov 4, 2008: Mastercard Trounces Earnings]
[Jul 30, 2008: Visa Rings Up Very Good Earnings - Should Bode Well for Mastercard]
[Jun 9, 2008: Mastercard, Visa see Gold in PrePaid]
[Apr 29, 2008: Mastercard Continues to Impress]
[Feb 4, 2008: Visa IPO Seeks Mastercard Riches]
[Jan 31, 2008: Mastercard Continues to be Priceless]
[Dec 7, 2007: Mastercard to Benefit from Visa IPO Hype]
[Oct 31, 2007: Bravo Mastercard]

Long Mastercard in fund; no personal position

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