Swipe Shares of Visa in 2011

After the rush of the Christmas holiday shopping season, many of us are reluctant to look at our January credit card bills. With Americans returning to the malls after nearly three years of deep recessionary conditions, this year will certainly be no exception.

But while excessive card swiping can make for a painful day of reckoning for shoppers, it is music to the ears of Visa V shareholders.

When I first mentioned Visa as potential investment, the response I got from one of my colleagues was rather blunt: “Have you lost your mind? You've been writing for two years about the American consumer being in debt trouble, and now you're recommending a credit card stock?”

Indeed I am. But the truth is, Visa is not really a “credit card stock,” per se. It's really a brand-management company that controls a sophisticated—and highly profitable—electronic toll road. Visa is not a bank and takes no credit risk to speak of; that is the job of the banks that issue cards branded with the Visa logo. Visa makes its money by charging banks service fees for the use of its Visa brand and its global electronic-processing network for credit and debit cards.

I know what you are thinking. The developed world remains mired in a deep consumer recession. Less consumer spending means fewer card swipes—and less revenue for Visa. That was my initial thought too, but total electronic payments have risen more than 30% in the last two years, despite being one of the worst consumer economies in history. Yes, the move to a cashless economy is very real, and Visa stands to be one of its biggest beneficiaries. It doesn't hurt either that Visa gets 40% of its revenues from abroad and much of this is from emerging markets in Asia and Latin America.

Visa has had a rough go at it in 2010. The stock started selling off during the spring on fears that that the new financial regulatory regime being discussed in Congress would hurt the company's business. Those fears proved to be well founded. By Congress's request, this month the Federal Reserve recommended a rather draconian cap on the fee that banks can charge merchants for accepting debit cards. In response investors punished Visa and rival card company MasterCard, sending shares down more than 10% in one day. At this stage, I believe the market is overreacting and that the effects of the Fed's recommendations—which will likely be revised before they are finalized in April—are more than fully reflected in the current stock price. The market got spooked by the Fed's announcement and reacted by pricing in a worst-case scenario. What this means for Visa investors is that anything even slightly less bad than the worst case scenario should cause the stock to rally substantially.

This article originally appeared on SFO Weekly.

Charles Lewis Sizemore, CFA

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