MasterCard Is Impressive, but Visa Is a More Defensive Stock

MasterCard (NYSE: MA  ) has continued to wow investors with high revenue and dividend growth, high operating margins, and an ultra-high ROE. Many would argue it's the undisputed leader in the credit card industry. However, Visa (NYSE: V  ) is no slouch either. Since its debut into the stock market in 2008, the card company has been a great growth stock. Visa has grown revenue at a 20% annual clip on average, which is quite impressive, considering that the company is considerably larger than MasterCard. Visa reported a $2.97 billion profit in 2010; three years later, the figure has almost doubled to $5.45 million, an astounding 83.75% growth. It's also noteworthy that Visa not only has a higher operating margin than MasterCard, it has a better dividend yield too.

The continued market run-up has made reasonably valued growth stocks as rare as homeless millionaires. Growth stocks are ideal investment instruments in a bull market, especially if they are as fairly priced as Visa. With a stock like Visa, an investor has some kind of downside assurance that if the markets get murky and start sliding, then the reasonable valuation will protect the stock from excessive losses. If the market heads even higher, the fair valuation will increase the stock's value proposition, eventually leading investors to notice it, and bid up its price. Visa provides the best of both worlds. That's good news for investors in 2014, since many analysts, including those on Wall Street, predict that 2014 will be the sixth straight year of growth for the stock market. 

Here's a rundown of how Visa, MasterCard, Discover Financial Services (NYSE: DFS  ) , and American Express (NYSE: AXP  ) have performed in the last 12 months.

 

Visa

MasterCard

American Express

Discover

Ticker

V

MA

AXP

DFS

Share price (12/11)

$205.66

$790.57

$83.90

$52.68

2013 YTD return

35.7%

60.9%

46%

36.7%

Market Cap

$131 billion

$95 billion

$90 billion

$25 billion

Revenue

$11.8 billion

$8.1 billion

$30.4 billion

$6.8 billion

Profit margin

42.3%

38.2%

15.4%

34.5%

Return on Equity

18.3%

42.5%

24.2%

26%

Net Income

$4.9 billion

$3.1 billion

$4.6 billion

$2.3 billion

Earnings per Share

$7.59

$25.28

$4.23

$4.46

Forward Dividend Yield

0.8%

0.3%

1.1%

1.5%

Price to Book

4.7x

12.0x

4.8x

2.5x

Price to Forward Earnings

19.8x

25.5x

15.5x

10.4x

Zero credit risk
Both Visa and MasterCard have generally outperformed American Express and Discover over the years, mainly because they have zero credit exposure. The two are merely payment-processing companies. On the other hand, American Express and Discover Financial Services are both payment processors and lenders. Although this attribute helps them double-dip in profits, it also exposes them to the considerable risk of bad debt write-offs. This is especially important if economic growth continues to be tepid, and consumers default on their debt payments. Visa and MasterCard have essentially no bad debt exposure, and thus enjoy freedom to grow with minimal limitations. 

Although Visa has continued to dominate the local market while MasterCard is considered to have a bigger global reach, Visa has been making big inroads into markets abroad as well. Visa managed to grow its cross-border volume by 10% in the last quarter, and this is likely to remain a fairly consistent baseline for the company moving forward.

Huge prepaid opportunity
The immense popularity of prepaid cards has been a huge growth catalyst for debit card companies. Many consumers have turned to prepaid cards after their credit histories were left in shreds in the aftermath of the latest recession.

Prepaid cards have been a particular sweet spot for both Visa and MasterCard. Although the prepaid market has been growing at a 20% annual clip, according to a recent Mercator Advisory Group report, there's still room to run. According to a forecast by Companies and Markets, the market for prepaid cards will hit $2.1 trillion by 2018. This provides these two kings of plastic with an excellent opportunity to grow their bottom lines even further.

American Express and Discover
Visa and MasterCard engage multiple organizations, whereas American Express and Discover are more akin to one-stop shops. They issue their own cards, authorize consumer purchases, and then settle with both merchants and consumers.

American Express was the first company to issue its customers a plastic card. In 1987, the firm introduced revolving payments. The firm generally charges merchants a higher fee than the other three, and this may account for its smaller global reach than Visa and MasterCard. The company says that its cards are accepted in 130 countries worldwide.

Discover Financial Services was introduced into the scene by big box retailer Sears Holdings in 1985 in its efforts to expand into the financial services industry. The company was later sold to Dean Witter, which in turn was acquired by Morgan Stanley. The firm's cards are accepted at 4 million locations worldwide, considerably less than the number of locations that accept Visa, MasterCard, and American Express.

The considerable credit exposure of American Express and Discover makes these two riskier investments than either Visa or MasterCard.

Who's better?
Visa processed transactions worth $6.4 trillion through its VisaNet platform in 2012. The company can process about 24,000 transactions per second. There are 2.1 billion Visa-branded cards in use worldwide. That's roughly twice what MasterCard commands. Visa occupies a huge moat and it is, in my opinion, better placed than MasterCard to leverage the network effect on account of its sheer size. Although MasterCard has a slightly better future growth profile, I would recommend Visa because of its much more appealing valuation, which gives it a better chance of withstanding a market downturn with minimal capital erosion.

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