With the exception of American Express (NYSE:AXP), investors have only recently been able to grab a piece of the credit-card market. For years, the big players were controlled by thousands of banks around the globe. But both Visa (NYSE:V) and Mastercard (NYSE:MA) are now independent companies, and Discover Financial Services (NYSE:DFS) was released from its former parent Morgan Stanley last summer.
Choices galore! Let the games begin!
A battle of twins?
Now that investors have a gaggle of credit card providers to choose from, which, if any, are worth your money? The contest is likely centered on a brawl between Visa and Mastercard. Why? Both are enormous, popular, nearly identical in operations, and have exploded from their respective IPOs.
First, an overview. Perhaps the greatest misconception about Visa and Mastercard is that they're on the hook for the losses attached to delinquent credit card bills. Not so. Neither extends credit to cardholders, or takes responsibility for consumers up to their eyeballs in debt. Banks like Citigroup (NYSE:C), Bank of America (NYSE:BAC), and JPMorgan Chase (NYSE:JPM) provide the money and handle the debt, for better or worse; Visa and Mastercard just facilitate the transactions.
Still with me? Good. Now let's look at some of the numbers from last quarter:
|
Metric |
Mastercard |
Visa |
|---|---|---|
|
Market cap. |
$35 billion |
$77 billion |
|
Revenue |
$1.18 billion |
$1.45 billion |
|
Global market share |
28% |
60% |
|
Net income |
$447 million |
$314 million |
|
Net margin |
37.8% |
21.6% |
|
Average 2008 EPS Estimate |
$8.73 |
$2.04 |
|
2008 P/E |
30x |
34x |
|
Increase in transactions processed |
15.7% |
15% |
Nothing here should really jump out at you. Visa is more than twice the size of Mastercard in terms of market cap. Both have healthy profits. Both trade at relatively high multiples to expected earnings. Looking for a distinction between the two? At this vantage point, we might be able to come up with one hazy assertion: Mastercard is smaller, so its prospects for growth -- all else being equal -- might be better than Visa's.
You're more right than you know
Ahh, and that's where things get exciting, Fools. You see, before Mastercard and Visa ventured into the public markets, they were owned by thousands of membership banks. When it came time to go public, a choice had to be made about what to do with a lucrative market: Europe. Why is Europe so lucrative for credit card processors? The integration of the single-currency Euro over the past decade brought prospects of exceptional growth, since intercountry commerce became less cumbersome.
When Visa went public, it left its Visa Europe organization separate from the shares you and I can purchase. Visa Europe is still owned by some 4,600 European banks, and operates as a licensee of the Visa you can purchase stock in. With Mastercard, however, you get the European operations when you purchase the stock. All of it. It's all included in the public company.
What's the growth potential like in Europe? In 2007, Mastercard processed over $2.2 trillion worth of transactions. From this amount, $659 billion came from Europe -- 16.2% more than the year before. To put that growth in perspective, the United States registered growth of 10.4%. The Asia/Pacific region -- obviously known for booming economic expansion -- clocked 17.1% growth. That Europe's growth was able to nearly match the Asian region is testament to how lucrative it is for shareholders -- growth you'll get only with Mastercard.
The verdict
These are both stellar companies, providing investors a chance to participate in the near duopoly they enjoy. If you're mulling over investing in either, it might be easy to view the size and strength of Visa as evidence of it being a market powerhouse. It is. But that alone shouldn't set the tone of your decision. Just as investors in Blackstone and Fortress Investment Group have learned, sometimes shareholders don't always get the most lucrative portion of the company's pie.
Because Mastercard lets investors in on the European action, its growth prospects going forward are likely a notch ahead of Visa's.
Your turn
Our 110,000-member CAPS community currently rates Visa a 4-star pick, while Mastercard holds a neutral 3-star status. What do you think about their potential? We'd love to hear from you over at CAPS. Click here to come on over and share your input.
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