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Visa Inc (V), Mastercard Inc (MA) & American Express Company (AXP): Is There Any Upside Left in Credit Cards?

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Visa Inc (NYSE:V)The three credit services providers, Visa Inc (NYSE:V), Mastercard Inc (NYSE:MA) and American Express Company (NYSE:AXP) have all been on a good run during the last few months. However, one has outperformed the others.

Over the last year, Visa Inc (NYSE:V) has gained 47%, outperforming the S&P 500 (by around 30%) and its closest peers American Express and Mastercard Inc (NYSE:MA), which have gained 28% and 34% respectively.

But is this too much? Is there still upside at Visa or would I be worth looking elsewhere?

Current valuation

Visa Inc (NYSE:V) processes many more transactions than both American Express Company (NYSE:AXP) and MasterCard put together. Indeed, during the third quarter of 2012, Visa processed 20.5 billion transactions worldwide, way more compared to Mastercard Inc (NYSE:MA), which only processed 8.6 billion. There are also many more Visa branded cards in circulation, although not as many as the higher number of transactions would suggest.

As of the third quarter in 2012, there were 2 billion Visa branded cards in circulation, while MasterCard only had around 1.86 billion and American Express Company (NYSE:AXP) had only 100 million.

The high number of cards in circulation and transactions processed, indicate that Visa Inc (NYSE:V) does indeed deserve a premium over its peers. Having said that, Visa’s current valuation premium could be greater than it needs to be.

I have used enterprise value, or EV, figures here as they are usually a more accurate measure of valuation, taking into account values of debt and cash balances.

EV/EBITDA EV/Revenue
American Express 12.3 3.7
MasterCard 15.5 8.7
Average Main Peers 13.9 5.1
Visa 18.3 11
Visa premium over peers 32% 117%

On both valuation methods, Visa Inc (NYSE:V) trades at a premium to its peers, and despite the company’s higher transaction volumes and larger number of cards in circulation, it is hard to justify the EV/Revenue premium, which is above 100%. On the other hand, the company’s EV/EBITDA premium is only 30%, still high but justifiable based on the company’s additional exposure.

Future valuation

Elsewhere, it would also appear the Visa trades at a high forward valuation when compared to its peers.

Company 2012 2013E 2014E 2015E
American Express 18.1 16.4 15.1 14.3
MasterCard Inc (NYSE:MA) 28 23.1 20.2 17.5
Average Main Peers 16.7 14.8 13.9 13.1
Visa Inc
(NYSE:V)
56.8 24.7 21.8 19.1

With such a high future valuation the market is placing an additional premium on the company and its ability to grow.

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