Visa Details
Visa Inc (NYSE:V) makes most of its money from card service fees, data processing fees, and international transaction fees. Service fees make up about 38% of Visa’s revenues and include fees paid by customers to participate in certain card programs. Data processing fees account for 33% of revenues and are primarily fees charged to merchants who accept Visa cards as payment. Finally, International transaction fees make up 24% of Visa’s revenues and are the fees charged when the merchant and card issuer are in different countries.
Visa Inc (NYSE:V) plans on continuing the expansion of its payments network, particularly in international markets. Emerging markets are just transitioning to the mainstream use of non-cash payments, and this is an area where Visa sees a particular opportunity for growth. Think of the U.S. in the late ’90s and early 2000s. While credit cards were already widely accepted, it was not until this point when credit cards became the dominant way to pay for everyday items. Consider Visa Inc (NYSE:V)’s revenues over the past decade. This is the potential for credit cards in emerging markets now:
Valuation and Alternatives
Visa trades at a lofty valuation of 26.4 times TTM earnings, but don’t be fooled by that high number. Visa Inc (NYSE:V) is expected to earn $7.34 per share this year, growing to $8.50 and $9.93 in 2014 and 2015, as analysts seem to have great confidence in the potential for expansion of the payment network. These numbers translate to an average annual earnings growth rate of 17%, which more than justifies the high valuation. Making Visa even more appealing is its debt-free balance sheet and almost $3 billion in cash.
The most logical alternatives are other payment networks, such as Mastercard Inc (NYSE:MA) or Discover Financial Services (NYSE:DFS).
MasterCard is similarly valued at 23.8 times earnings, and has also had a huge upside move over the past couple of years. The company is expected to grow earnings at almost the exact same rate as Visa Inc (NYSE:V), at just under 17% annually. MasterCard also has an even better cash pile than Visa, with over $5 billion in the bank.
Discover has had a similar gain, and happens to be the best dividend stock of the three, yielding just under 2% annually. Unlike the others, Discover trades at a very low 9.7 times TTM earnings, and is perceived as slightly riskier than the other two. However, the consensus calls for forward growth of just 8%, but I think this may be too conservative. Discover is beginning a partnership with PayPal this year, which will provide a mobile wallet to PayPal and its 117 million users, via Discover cards. If this catches on well, who knows how big it could be for Discover?
Is it Worth a Look?
Yes, but proceed with caution. At these high valuation levels, I would wait for more evidence of the credit markets thawing before jumping into Visa Inc (NYSE:V). Discover may be worth a look for those with a bit more risk tolerance, or for those who are more income-oriented, but I wouldn’t recommend it for a large investment. Out of the other two, with all of the numbers being almost equal, I would have to go with the brand recognition that goes with Visa. Additionally, Visa is much more well-known internationally, and as mentioned, this is where I see most of Visa’s growth coming from in the years ahead.
The article Can the Gains in Payment Processing Continue? originally appeared on Fool.com.
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