In many cases, consumers carry at least one or more of these cards in their wallets. And, while credit may make purchases convenient for users, shareholders of these entities have also brought in some financial rewards as well.
Discovering profit opportunities
Discover Financial Services (NYSE:DFS) offers both direct banking and payment services to individual and business consumers in the US. It also offers other consumer- banking products such as home loans, personal loans, private student loans, and prepaid credit cards. Over the past quarter, Discover’s revenue growth has outpaced – albeit slightly – that of the overall industry of just more than 4%.
The company’s quarterly revenue increased by 4.3% compared with last year’s second quarter. This revenue growth has likely been a major catalyst for boosting the company’s earnings per share.
Recently, Discover Financial Services (NYSE:DFS) signed contracts with 50 merchant acquirers. This deal will essentially extend the in-store acceptance of for PayPal – bringing this number in excess of 2-million merchant outlets by the end of this year.
Although Discover’s current debt-to-equity ratio is in the neighborhood of 2, investors have been well rewarded in that the company’s share price is up nearly 14% year-to-date in 2013 and more than 32% in the past year. And, while anything can happen in a volatile stock market, a cash-flow margin of almost 50%, and increased consumer spending with improving payment volume could help the upward momentum that Discover Financial Services (NYSE:DFS) has seen of late continue.
Following the leaders
Mastercard Inc (NYSE:MA) offers payment solutions to consumers, as well as payment and transaction-processing services to companies in both the US and internationally. The company is ironically headquartered in Purchase, New York.
Recently, Grammy and Emmy award winning star Justin Timberlake joined forces with MasterCard for a two-year deal that focuses on both brand collaboration as well as unique fan experiences for card users. These will include special performances by the singer himself, and they will also highlight the benefits of being a Mastercard Inc (NYSE:MA) cardholder.
MasterCard has also been a large proponent of Financial Literacy Month, adding PayPerks as a complimentary financial-education platform for all of the company’s Direct Express Debit Mastercard Inc (NYSE:MA) cardholders. The company’s Direct Express program is used by the United States Department of the Treasury in disbursing social-security payments, as well as veterans’ benefits and other types of federal payments electronically.
Mastercard Inc (NYSE:MA) also reported a 10% improvement in total international gross-dollar volume, with the majority of the gains coming from emerging markets. The strength in the international markets will enable MasterCard to propel its year-over-year sales growth rate up to 15% over the next four years.
While Mastercard Inc (NYSE:MA) pays a dividend of $2.40 per share, as computed with the company’s share price, investors only receive a dividend yield of 0.40%. So, for income-seeking investors, this stock may not be the ideal choice.
In terms of share-price growth, however, analysts expect MasterCard’s stock to rise by more than 8% over the next year. Most of that expectation is based on compound sales growth-rate estimates for the next five years in the mid-teens, as well as improvement in the operating cash flow margin to the mid-to-high 30s.
Likewise, Visa Inc (NYSE:V) is also expected to move forward with growth in its share price. One potential catalyst for this is due to the company’s strong revenue growth along with improvement in its balance sheet. In fact, the company literally has no debt to speak of – which is viewed as an extremely favorable sign.
This large technology company engages in operating retail electronic payments across the globe. It also helps in facilitating commerce via the transfer of value and related information among various financial institutions.
Things look good for the largest retail-payments network in the world. The company earns most of its income from its card-service fees – roughly 40% of the total, as well as from data processing and international transaction fees.
Backed by the international volume increase of almost 10%, Visa Inc (NYSE:V) reported strong revenue growth from the international markets in the first quarter. Going forward, Visa also sees increased revenue from the improving transaction and assessment fees in those markets. The company’s plans to continue the expansion of its payments network – specifically in the area of international markets – can payoff nicely, especially as emerging markets are just now transitioning into the mainstream use of non-cash payment options.
Visa Inc (NYSE:V)’s gross profit margin is also quite positive, coming in at more than 80%. Also impressive was first-quarter net income, which rose by more than 25% compared to the year-ago quarter and beat analysts’ estimates by a wide margin. These financials helped to move Visa’s share price up by more than 38% over the past year – a price that is justified by the company’s low PEG ratio of 1.2.
Expansions
Just as with Mastercard Inc (NYSE:MA) and Visa Inc (NYSE:V), Discover Financial Services (NYSE:DFS) may need to expand deeper into international markets in order to keep its growth pace on track. Many such markets are akin to what the US was like back in the 1990s when, even though credit was available, it was not yet considered to be a primary purchase method until the following decade.
These large financial institutions will also need to continue monitoring the credit history of their new consumer and business credit-card holders, as the recent economic downturn has led to a higher number of unpaid accounts.
The bottom line
All three of these companies have the ability to offer investors a nice amount of growth – both in the short run and long run, provided that they keep debt levels low, their fee levels in check, and expand their services where needed. As both US and worldwide societies continue to use cash on a less frequent basis, the credit card companies will have room to profit and grow, meaning positive results for their shareholders as well.
The article Investors Discover That Credit Companies Can Pay Off originally appeared on Fool.com.
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