Transaction volumes for credit and debit cards and other payment methods depend on consumer spending. Last May, it saw its biggest annual increase in two years and this was great news for companies that are linked to the electronic payments industry.
Let's take a look at two companies in this highly competitive and mature industry and see which one is doing better and thus stands as the best investment option.
The Dominant Player
Visa Inc. (V, Financial) is the world's largest retail electronic payments network and leading payments brand, providing services to consumers, businesses and governments globally. The company has four revenue segments: Service revenues (39% of gross revenues in fiscal 2012), Data Processing (32%), International Transaction (24%) and Others (5%).
Mobile Tech
The company announced that it has signed agreements in order to make Visa payments using mobile technology. Due to the increase in the mobile point-of-sale solutions, those agreements were signed with the following mPOS providers, iZettle, SumUp and SCCP Group´s Swiff. Because of the acceptance as a method of payment, the mPOS terminals increased year over year to 9.5 million in 2012 and is expected to reach 38 million by 2017.
Expanding the Business
The company intends to expand the size of its payments network in high-growth geographies in which it currently operates and also increase the number of countries in which it provides value-added services, such as enhanced risk management, dispute processing, loyalty programs, alerts, offers and other information-based services, which are enabled by a centralized global processing platform.
Valuation
In terms of valuation, the stock sells at a trailing P/E of 34.8x, trading at a premium compared to an average of 14.4x for the industry. Analysts’ expectations imply a forward P/E of 19.17. To use another metric, its price-to-book ratio of 5.81 indicates a premium versus the industry average of 1.36x and the price-to-sales ratio of 14.96x is above the industry average of 2.34x.
The Number Two
MasterCard Incorporated (MA, Financial) is the world’s second-largest payments network. Together with its subsidiaries, provides transaction processing and other payment-related services in the U.S. and internationally.
Japan Opportunity
The company is trying to expand the business in Japan through POS terminals over the next three years, with focus on a technology that makes transactions faster and more convenient in making contactless transactions. The company determined that in 2012 there was a 28% growth of contactless payments across the Asia Pacific, Middle East and Africa.
Globalization
More than 60% of revenue is generated outside the U.S. in 2012, and this will be the focus in the next years. The European region, Latin American and Asia/Pacific countries are the targeted geographies trying to pursue incremental payment processing opportunities.
Its P/E multiple on a trailing-12 month basis is 30.5 and the forward P/E multiple is 23.75.
Finally, I always like to see of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity.
It is very important to understand this metric before investing in a high-growth company.
Final Comment
Payment companies’ profitability is driven by their ability to reach new markets and meet customer needs. The rapidly expanding mobile devices market and recent developments in technological applications and mobile payment services are seen as a major growth opportunities going forward. Due to this change in consumption patterns, companies in the payments segment who do not modernize will start to lose market share to their rivals.
I believe it is the right time to add Visa’s stock to your long-term portfolio; due to its diversified business model, the firm is well positioned to outperform its peers. Hedge fund gurus like John Burbank and Louis Moore Bacon added this stock to their portfolios, and I would advise fundamental investors to consider adding this stock to theirs as well.
Disclosure: Damian Illia holds no position in any stocks mentioned.
Let's take a look at two companies in this highly competitive and mature industry and see which one is doing better and thus stands as the best investment option.
The Dominant Player
Visa Inc. (V, Financial) is the world's largest retail electronic payments network and leading payments brand, providing services to consumers, businesses and governments globally. The company has four revenue segments: Service revenues (39% of gross revenues in fiscal 2012), Data Processing (32%), International Transaction (24%) and Others (5%).
Mobile Tech
The company announced that it has signed agreements in order to make Visa payments using mobile technology. Due to the increase in the mobile point-of-sale solutions, those agreements were signed with the following mPOS providers, iZettle, SumUp and SCCP Group´s Swiff. Because of the acceptance as a method of payment, the mPOS terminals increased year over year to 9.5 million in 2012 and is expected to reach 38 million by 2017.
Expanding the Business
The company intends to expand the size of its payments network in high-growth geographies in which it currently operates and also increase the number of countries in which it provides value-added services, such as enhanced risk management, dispute processing, loyalty programs, alerts, offers and other information-based services, which are enabled by a centralized global processing platform.
Valuation
In terms of valuation, the stock sells at a trailing P/E of 34.8x, trading at a premium compared to an average of 14.4x for the industry. Analysts’ expectations imply a forward P/E of 19.17. To use another metric, its price-to-book ratio of 5.81 indicates a premium versus the industry average of 1.36x and the price-to-sales ratio of 14.96x is above the industry average of 2.34x.
The Number Two
MasterCard Incorporated (MA, Financial) is the world’s second-largest payments network. Together with its subsidiaries, provides transaction processing and other payment-related services in the U.S. and internationally.
Japan Opportunity
The company is trying to expand the business in Japan through POS terminals over the next three years, with focus on a technology that makes transactions faster and more convenient in making contactless transactions. The company determined that in 2012 there was a 28% growth of contactless payments across the Asia Pacific, Middle East and Africa.
Globalization
More than 60% of revenue is generated outside the U.S. in 2012, and this will be the focus in the next years. The European region, Latin American and Asia/Pacific countries are the targeted geographies trying to pursue incremental payment processing opportunities.
Its P/E multiple on a trailing-12 month basis is 30.5 and the forward P/E multiple is 23.75.
Finally, I always like to see of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity.
| Company | ROE | Compared to Industry Mean (=9.3) |
| Visa | 18.27 | Above |
| Mastercard | 39.9 | Above |
It is very important to understand this metric before investing in a high-growth company.
Final Comment
Payment companies’ profitability is driven by their ability to reach new markets and meet customer needs. The rapidly expanding mobile devices market and recent developments in technological applications and mobile payment services are seen as a major growth opportunities going forward. Due to this change in consumption patterns, companies in the payments segment who do not modernize will start to lose market share to their rivals.
I believe it is the right time to add Visa’s stock to your long-term portfolio; due to its diversified business model, the firm is well positioned to outperform its peers. Hedge fund gurus like John Burbank and Louis Moore Bacon added this stock to their portfolios, and I would advise fundamental investors to consider adding this stock to theirs as well.
Disclosure: Damian Illia holds no position in any stocks mentioned.
