{"id":38130,"date":"2013-05-07T02:24:40","date_gmt":"2013-05-07T06:24:40","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=38130"},"modified":"2013-05-07T02:24:40","modified_gmt":"2013-05-07T06:24:40","slug":"visa-and-mastercard-dont-chase-them-higher","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/05\/07\/visa-and-mastercard-dont-chase-them-higher\/","title":{"rendered":"Visa and MasterCard: Don\u2019t Chase Them Higher"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

Credit card giants MasterCard (NYSE:$<\/span>MA<\/a>)<\/b> and Visa (NYSE:$<\/span>V<\/a>)<\/b> both crushed earnings estimates this past week, and both are sitting near new all-time highs.<\/p>\n

Not bad, considering the line of work they are in.\u00a0 Given that the global economy has been tepid at best lately and that unemployment remains stubbornly high, you might not expect companies that depend on consumers opening their wallets to perform well.<\/p>\n

But by focuses narrowly on the consumer angle, you miss the proverbial forest for the trees. MasterCard and Visa\u2014along with American Express (NYSE: $<\/span>AXP<\/a>)<\/b> and, to a lesser extent, Discover (NYSE:$<\/span>DFS<\/a>)<\/b>\u2014are some of the prime beneficiaries of two of the most powerful macro trends of the past 20 years:<\/p>\n

    \n
  1. The\u00a0\u00a0 transition to a global cashless society<\/li>\n
  2. The rise of the emerging market consumer<\/li>\n<\/ol>\n

    The first point should be obvious.\u00a0 Even in the United States, where credit and debit cards are ubiquitous, roughly 40% of all transactions are conducted with cash or paper checks.\u00a0 Not all transactions will ever be captured with credit and debit cards, of course, but with internet commerce growing relative to \u201cbricks and mortar,\u201d you can bet that the percentage will grow.<\/p>\n

    Demographics also play a role here.\u00a0 Older consumers who might never have embraced plastic are a shrinking segment of the population, whereas anyone under the age of 50 grew up with credit cards and anyone under 30 learned how to swipe a credit card before they could walk.<\/p>\n

    I exaggerate\u2026but not all that much.<\/p>\n

    Card usage is also working its way down the economic ladder.\u00a0 Consumers without access to traditional credit or banking services are embracing prepaid cards branded with the Visa and MasterCard logos, and both companies are experimenting with ways to let consumers pay at retail cash registers using their mobile phones.\u00a0Even American Express, which has traditionally focused on a more patrician business clientele, has partnered with Wal-Mart (NYSE:$<\/span>WMT<\/a>)<\/b> in promoting its Bluebird prepaid cards (see \u201cIs Amex Going Slumming?<\/a>\u201d).<\/p>\n

    This is a long way of saying that even if overall consumer spending growth is tepid, growth in electronic payments has plenty of room to grow.<\/p>\n

    The second point is the one I find the most promising, however.\u00a0 Credit and debit card usage is soaring in virtually all major emerging markets as incomes rise and consumers join the ranks of the global middle class.\u00a0 Rising incomes and growing financial sophistication can only mean a higher percentage of transactions move from cash to plastic. Both Visa and MasterCard stand to benefit from this trend, though Visa has the better presence globally.\u00a0 Visa expects to get more than half of its revenues from overseas by 2015, and the overwhelming amount of this will come from emerging markets.<\/p>\n

    So what\u2019s the downside?<\/p>\n

    As I see it, there are two.\u00a0 The first is competition from other mobile payment solutions<\/a> such as eBay\u2019s (Nasdaq:$<\/span>EBAY<\/a>)<\/b> Paypal and Square.<\/p>\n

    It gets a little muddy here, however.\u00a0 Paypal is a payment mechanism in of itself, but it is also a facilitator for payment with a traditional credit card. Up until this point, the mobile revolution has been nothing but beneficial for the traditional credit card companies. The card readers for Square and Paypal Here turn any Apple (Nasdaq:$<\/span>AAPL<\/a>) <\/b>iPhone or Google (Nasdaq:$<\/span>GOOG<\/a>)<\/b> Android device into a mobile point-of-sale terminal.\u00a0 Even an ice cream man or hot dog street vendor can take payment by card now.<\/p>\n

    But this is also a fast-changing area, and there is a possibility that Visa and MasterCard can see themselves getting pushed out as unnecessary middlemen.\u00a0 On my recent visit to Home Depot (NYSE:$<\/span>HD<\/a>)<\/b>, the cash registers gave me the option to pay with Paypal. Today, this is a novelty.\u00a0 But in five years, will it be the norm?<\/p>\n

    Maybe, maybe not.\u00a0 But given the rate of change in this space, I am reluctant to pay too high a premium for the stocks in this sector.\u00a0 The growth is impressive and the profit margins are so high as to be absurd.\u00a0 But as with any investment, you don\u2019t want to overpay.<\/p>\n

    And this brings me to the second downside.\u00a0 Both MasterCard and Visa sport valuations that are reminiscent of the 1990s tech bubble.\u00a0 Visa trades for an absurd 50 times trailing earnings and 21 times expected 2014 earnings.\u00a0 MasterCard, at 25 times trailing earnings and 18 times forward earnings, almost looks reasonable by comparison.\u00a0 Almost.<\/p>\n

    As much as I like both companies, I\u2019m not comfortable paying these prices.\u00a0 For now, I\u2019d recommend you pass on Visa and MasterCard.<\/p>\n

    In the card sphere, American Express would appear to be the best bargain.\u00a0 Unlike Visa and MasterCard, Amex actually accepts credit risk, but I am ok with that.\u00a0 In an improving economy, that is not such a bad thing. Amex trades for 13 times expected earnings and pays a 1.2% dividend.<\/p>\n

    Disclosures: Sizemore Capital is long WMT.<\/p>\n

    SUBSCRIBE\u00a0<\/a><\/strong>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

    \n

    Related posts:<\/p>\n