In the credit card industry, the three major players are Visa (V), MasterCard (MA), and American Express (AXP). There are positive and negative financial aspects for all three of these companies. Should you invest in any of these companies? That is the question every investor who is thinking about getting into the credit industry wants to know the answer to. I will examine all three companies and make the case for why MasterCard is the best investment based on its numbers.
Visa saw decent results in the first quarter that surpassed expectations. EPS increased 30% due to the smaller amount of shares outstanding. Visa has also been investing in electronic payment systems, which is positive for future growth. The company has seen an increase inpayment volume and transaction volume in the United States and in foreign markets.
Visa has also acquired several companies that will help growth in the mobile and eCommerce markets. It acquired three companies that specialize in this area: PlaySpan, Fundamo, andCyberSource. This is great for Visa and will help it with inorganic growth and expand into new markets.
Visa has a solid balance sheet with $5.7 billion in cash on hand and long-term investments. This will help Visa with future expansions, as this will be the key to future success. Expanding into additional markets is a must if Visa wants to keep its impressive revenue growth in the mid-teens going.
Lastly, since Visa has several key foreign markets such as Brazil, Canada, China, the UnitedArab Emirates, and Australia, it’s important to consider increasing regulation for the credit industry in those regions.
Despite the increase in operating expenses and many analysts projecting that the stock willhave a neutral performance this year, I believe MasterCard is doing well in the sense that it has no major debt. The company has a clean balance sheet with more than $5 billion in cash.
MasterCard also consistently sees a strong operating margin of 54%, return on its assets of 23%, ROE at 43%, and compound growth in revenue of more than 12%. In fact, revenue is near record highs.
MasterCard currently trades at price to earnings of 25 suggesting higher than average growth when compared to its peers. Analysts are expecting the stock to trade at a 17 times earnings inthe future with a projected 40% compound growth in EPS. All these factors point to a brightfuture for MasterCard.
American Express is currently growing strong. The company’s reported growth results were 8% in the first quarter. American Express also saw around a 22% ROE, which puts the company inthe top 5% compared to its competitors in the credit industry.
The growth was driven by two main factors. American Express saw an impressive 80% increase in income and a 3% decline in outstanding shares. American Express has a customer base thatspends a lot of money, so other businesses are willing to pay the company higher than averagetransaction fees. American Express is expanding on this advantage and growing its customerbase by offering new pre-paid services through Bluebird and Serve.
However, not all the news is good for American Express. Though the price of the stock is nearing its highest point in 10 years, the dividend yield of 1.15% is at its the lowest point in three years. Opinion seems to be divided on the future of American Express. Analysts are predicting growth near 5% for the next year, but the stock still has a low PEG ratio of 1.3.
The bottom line
Companies in the credit industry, just like any other industry, have their positive and negative aspects. Investors are still attracted to companies in the credit industry because it can result in a higher alpha. Investors can, however, decrease the amount of risk by carefully analyzing the companies involved.
It would appear that MasterCard has a more positive outlook than its competitors. Its financial numbers are quite strong. Revenue is close to a record high and the company is seeing a strong ROI. MasterCard is also debt free and has a good amount of cash on hand. That is why I recommend buying MasterCard stock if you are looking to invest in the credit industry.