A Closer Look At Visa And MasterCard

Last week, the Federal Reserve issued a final rule on establishing standards for debit card interchange fees as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The finalized rule will cap debit card fees at $0.21 to $0.24 per transaction for banks with more than $10 billion in assets. This number is about half of what the current fees are, but nearly double the $0.12 cap that the Fed had proposed in December. It is a compromise in every sense. The banks and credit card companies are not terribly happy, but neither are retailers. The provision will go into effect on October 1, 2011. Both MasterCard MA and Visa V shares plunged back in December on the initial $0.12 per transaction proposal. Bargain hunters who picked up the stocks in the wake of the negative news, have done quite well for themselves as both stocks have performed tremendously since that time. Year-to-date, MA is up 41.5% while V has gained 27%. A significant portion of both stock's gains came in the wake of last week's rulings, which propelled both MasterCard and Visa to double digit gains in the immediate aftermath of the announcement. Furthermore, both stocks have continued to rise this week. On Wednesday, Visa provided investors with its updated revenue, earnings, and growth outlook. The company said that while it anticipates hitting its previous guidance for fiscal 2011, growth will likely slow in 2012 as a result of the new interchange rules. The projected numbers, however, remain impressive. For 2011, the company still sees annual revenue to grow between 11% to 15% and EPS to grow more than 20%. In 2012, Visa is projecting high single-to low double-digit revenue growth and EPS growth in the middle to high teens. On a valuation basis, both stocks continue to look attractive, given their first-in-class franchises and superior competitive positions in the credit card space. Visa trades at a trailing P/E of 19.42, a forward P/E of 15.79, and a PEG ratio of 0.94. The median Wall Street price target on the name is $100.00, which compares to the current price of $89.63. MasterCard trades at a trailing P/E of 21.32, a forward P/E of 15.85 and a PEG ratio of 0.94. The median Wall Street price target on the stock is $330 compared to the current price of $316.20. Given the abysmal performance of banks and brokers in 2011, many investors are likely playing Visa and MasterCard in order to gain exposure to the financial sector in their portfolios. While banks and brokers are cheap, they haven't made stock investors any money in a very long time - quite the opposite. Visa and MasterCard, on the other hand, have seen their stock prices appreciate considerably and continue to trade at reasonable valuations. In the financial sector, it is hard to argue against these names as they are head and shoulders above the alternatives.