Ever since Visa
The argument for buying is clear:
- Both have tremendous growth prospects as global consumers shift to a cashless economy.
- The two share a virtual duopoly on the industry. Competition outside of American Express
(NYSE:AXP) and Discover(NYSE:DFS) is practically nonexistent. - Neither issues actual credit like Bank of America
(NYSE:BAC) and JPMorgan Chase(NYSE:JPM) do. These are basically technology companies hiding in financial companies' clothes.
Still, I'm hung up on the argument against. Mainly:
- Both stocks have traded at premium multiples. These aren't value plays.
- Their moats are valuable insofar as the barriers to entry stay intact. I can't see how either has much brand appeal compared to the other, though; most people don't care which logo sits at the bottom of their card.
- The consumer-spending trends that underscored the past decade are dead. Hopefully for good.
I'm torn. I don't want to be doubtful, but I am.
Negativity vindicated
Despite Visa's rock-solid performance, MasterCard's recent earnings only solidified my view. Fourth-quarter earnings came in at $1.84 per share, down 19% from the year before. Revenue increased 14%, yet total purchase volume grew just 3.4%. Global growth remains strong, but the U.S. market -- where almost half of volume presides -- continues to be a drag, falling 5.2%.
Even so -- here comes my indecisive side again -- MasterCard's long-term analyst earnings estimates (which should probably be taken with a grain of salt, of course) are pretty appealing. Have a look:
|
Year |
2009 |
2010 |
2011 |
2012 |
|---|---|---|---|---|
|
EPS estimate |
$9.88 |
$11.47 |
$14.13 |
$16.57 |
Data provided by Capital IQ, a division of Standard & Poor's.
With a share price of about $160, MasterCard is finally trading in a range that isn't pricing in exorbitant expectations. If the above earnings estimates are met, great! Investors will probably make a killing. If not (which I think is likely), all hope isn't lost. With shares down 50% since last summer, there's finally room for error.
Bottom line
Alas, I revert to the same feeling I've held for the past year: Both Visa and MasterCard are incredible companies, but I still can't justify paying these prices, even after they've come down this much. If forced to pick, I'd rather own MasterCard simply because I don't think either will meet expectations, yet Visa is still priced for perfection. If global consumer-spending trends follow the logical course of long-term pain, I have a feeling that patient investors will have the opportunity to buy these great companies at much better prices than can be had today. Be patient, Fools.
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