Visa & MasterCard: The World's Best Businesses I'll Never Buy

Let's do a quick brand recognition check:

If I say, "Life takes ____. It's everywhere you want to be."

Chances are, you'll say "Visa."

If I say, "There are some things money can't buy. For everything else, there's _____."

Chances, are you'll say "MasterCard."

This sort of recognition doesn't come by accident. Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) have plowed money into effective marketing campaigns over the years trying to edge each other out. While it's hard to call a winner, at the very least they've succeeded in entrenching themselves as an ultra wide moat duopoly in the payments space. Interbrand recently valued Visa's brand at a whopping $5.5 billion. MasterCard rings the register at $4.2 billion.

Visa and MasterCard have become so omnipresent that the idea that your average business won't accept one of them for payment isn't even entertained. Who really thinks twice about paying with a card these days? I mean it's just so darn easy.

When you mix equal parts strong brand with unconscious decision, the results are enough to make any investor drunk with enthusiasm.

Look no further than Altria for a case study in this equation of long-term value creation. The company has been one of the best-performing stocks over the last 50 years, propped up by its strong brand (Marlboro) and a product that gets bought and used as part of a generally unconscious habit.

Visa and MasterCard have carved moats so wide and so deep that they can still achieve a 13.6% and 38.1% return on capital, respectively. Their gross margins are nearly 100%, with both bringing home about 40% of their revenue as income. That's truly stunning for two companies with a combined market cap of $200 billion.

Both have wonderful businesses whereby each next swipe costs them virtually nothing extra to process because their networks are already built out. Not only that but both companies have long runways ahead. They can grow in an environment of flat or even negative GDP growth as people continue the long trend toward plastic (I couldn't tell you the last time I carried actual dollar bills), as well as expanding abroad. Eighty-five percent of the world's transactions are still completed with cash. Not only that, but since they take a slice of your swipe revenues should continue to rise along with any inflation instead of being crushed by it.

So after gushing affection for Visa and MasterCard, why do I sit admiringly on the sidelines?

All this greatness isn't exactly exclusive information. Mr. Market has bid Visa up to a steep 33 times earnings and MasterCard isn't far behind at 28 times.

This is the part where I should repeat Warren Buffett's well-known mantra to myself...

It's better to buy a great business at a fair price than a fair company at a great price. It's better to buy a great...

But I just can't convince myself that paying 30 times earnings for a $100 billion company is a good price. And don't even get me started on those paltry dividends.

At some point, the drag of being a company that large shows its face.

It doesn't help that as Visa and MasterCard grow larger so do the regulatory bull's-eyes on their backs. A federal judge recently struck down the 21-cent cap on interchange fees thinking the cap "runs completely afoul of the text, design and purpose." Basically, they were saying the fees were too damn high.

A new fee hasn't been proposed yet, but expect it to land closer to the 12 cents proposed by the Dodd-Frank Act.

While this will only apply to revenue earned domestically, the U.S. is still a cash cow market for both companies and a cap that low is a pretty hefty hit. 

I may very well sit around and watch both MasterCard and Visa operate wonderful businesses at lofty valuations forever because Mr. Market doesn't seem to want to let them come down to earth. I'm sure they'll both do very well in the future for all of the reasons outlined above, but at today's prices, so does everyone else.

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Editor's note: A previous version of this article stated that Visa and MasterCard directly profit from interchange fees. The Fool regrets the error.

Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 10, 2013, at 6:37 PM, Becker2011 wrote:

    This is a very easy explanation behind basically looking at one metric and doing all the work of reading one news article.

    One (agreeably) not so small, possible headwind and its immediately a "I'll never buy"

    Why would you not look at the reasons people are buying the stock and maybe provide a counter-arguement. IE amazing growth rates, how much of the world is cash (opportunity), no debt.

    Also, I realize you can't write a full analysis in just a article.... but I'm sure glad I didn't buy V when had a very high p/e of 44 last October - I would have only had a paltry 40% return......

  • Report this Comment On October 10, 2013, at 7:13 PM, osiris188 wrote:

    K so Don't buy V with a trailing P/E of 22.98 (according to yahoo finance) at $189.03/share

    Instead buy LNKD with a trailing P/E 865.21 (again, according to yahoo finance) at $227.55/share

    I'm not sure I buy it. Great counter arguments though about both V and MA, definitely food for thought.

  • Report this Comment On October 11, 2013, at 3:42 AM, AnsgarJohn wrote:

    Hi Austin, I saw you had a Outperform pick for Mastercard in CAPS

    03/06/13 MA Outperform 5Y $523.92 $678.59

    ( +3.25%) +29.52% +9.25% +20.27

    Are you ending that pick now?

  • Report this Comment On October 11, 2013, at 10:06 AM, TMFBWItime wrote:


    Very perceptive of you! As you can tell, I admire Visa and Mastercard from afar. I enter CAPS calls to track stocks that i'm interested in and would like to keep tabs on.

    My initial green thumb on Mastercard was when I first started looking at the company, and though I like what I see, it feels too expensive for me today.

    I'll be continuing my outperform rating though because CAPs is a great way to keep tabs on companies over a long horizon. Who knows, if the bottom falls out it just may get cheap enough for me.

    Fool on!

  • Report this Comment On October 11, 2013, at 4:18 PM, dswansso wrote:


    Interchange is not where Visa and Mastercard "make their moola" rather it is the scheme fees they charge network participants. The interchange cap you refer to impacts those institutions who issue debit cards under Visa and Mastercards scheme brands.


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