Credit cards have become a standard part of American life, and their expansion into emerging markets has made them popular growth plays. Given the tough competition in the industry and the number of legal challenges, many firms in the credit card industry are trading at very high valuations. With increasing valuations but steady growth rates, it may be time to take a step back.
Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) are similar companies. Both firms are middlemen and neither carries customer debt on their balance sheets. These firms have been successfully sued for anti-competitive behavior, due to high fees and onerous terms of service. The results of ongoing litigation are still up in the air. If major retailers win the ability to negotiate their own settlements, then credit card companies will face very expensive negotiations.
With a major legal battle looming in the distance and lack of expanding growth, it is imprudent that Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) are trading at richer forward price to earnings (P/E) ratios. From 2011 until 2013 their forward P/E ratios have significantly increased from around 15 to above 22. At the same time, Visa’s revenue growth rate has stayed the same while MasterCard’s revenue growth rate has fallen significantly.
Visa Inc (NYSE:V) benefits from growth in the emerging markets, but its overall revenue growth rate isn’t moving. Its second quarter 2013, year-over-year constant payment volume increased 13% in Asia Pacific and 21% in Latin America and the Caribbean. The company is profitable with a profit margin of 21.5%, a return on investments (ROI) of 8.9% and it is trading at a P/E ratio around 50. If its revenue was growing a quicker pace, then its increasing valuation would be easier to justify.
With no debt and well-known brand name, Mastercard Inc (NYSE:MA) is very similar to Visa. Even though MasterCard has suffered some highly visible fraud, the company is very profitable. Its profit margin of 37.7% and a ROI of 42.1% are significantly higher than Visa’s. Still, MasterCard’s revenue growth rate has fallen below Visa Inc (NYSE:V)’s and its current P/E ratio around 25 looks very expensive. The pending legal cases pertaining to its monopoly behavior only gives more cause for concern.