Visa Inc (V), Mastercard Inc (MA): Give More Credit to This Credit Card Company!

Discovering strength

A few days back Discover Financial Services (NYSE:DFS) posted solid results for the second quarter of fiscal 2013 with EPS of $1.20 per share, comfortably beating Street estimate. In terms of valuation, it is quite cheaper than Visa and Mastercard Inc (NYSE:MA) with a Price to Book Value (PBV) ratio of 2.3 and Price to Earnings Growth (PEG) ratio of 0.88. Discover’s direct banking business picked up good pace in the quarter with a loan growth of around 6%, getting in higher revenue in form of interest income. The interest rates have surged in the last month mainly due to Fed’s decision to taper off the Qualitative Easing (QE) program. I expect the rates to rally further as there is still some uncertainty regarding the QE program, which will prove to be beneficial for Discover as well as other companies in the sector.

Visa is tackling rules well

We know that the U.S lawmakers have invested persistent efforts in reviving the economy with new set of rules and regulations. The Dodd-Frank rules is one of such efforts with the motive of ensuring financial stability. The comforting news is that Visa has successfully adopted the routing rules established under Dodd-Frank. As a result, the company saw positive growth for Interlink payment volume and is also expecting the growth rates would continue to grow for debit card transactions in the future.

Journeying upward

Visa along with other peers is standing right at the onset of a consistent economic recovery complemented by stupendous growth in technology. Moving ahead, Visa will experience reasonable growth fueled by (i) economic recovery and (ii) greater use of plastic money by customers, both online and offline. The positive outlook can be clearly seen in management’s decision to raise guidance on revenue and earnings. The company has raised full year 2013 revenue growth guidance from low double-digits to around 13%. Also, it has announced a $1.5 billion share repurchase program to give back excess cash to shareholders.

A look at the results of major companies in this sector including Visa is good enough to interpret that the industry is getting back on its feet. However, I would definitely pick Visa as a worthy investment because of its moderate valuation and highly optimistic management. This is a good time to build a new position in this stock.

The article Give More Credit to This Credit Card Company! originally appeared on Fool.com and is written by Mihir Mehta.

Mihir Mehta has no position in any stocks mentioned. The Motley Fool recommends MasterCard and Visa. The Motley Fool owns shares of MasterCard. Mihir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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