Unlike their competitors, Mastercard (NYSE: MA; Price: $199.69) and Visa (NYSE: V; Price: $67.79) don’t lend money; they license their brands to banks. So, they aren’t being hit as hard as true credit-card issuers by the rise in defaults.
The drop in the value of the dollar and in consumer spending has hurt the stock value of businesses that are involved in processing card payments, says Sharath M. Sury, who is a University of California finance professor. However, as the economy recovers, the credit-card industry should profit as a result of consumer spending and efficient operations. Mastercard and Visa are enjoying growth internationally, especially in debit-card use.
Increased debit-card use leads to more transaction fees. From Mastercard’s and Visa’s perspective, this is good news. However, if the government forces credit-card firms to lower transaction fees, company profitability could suffer, says Bob Bacarella of Monetta Young Investor Funds, which owns shares in both companies. The silver lining: The loss in revenue from these fees “could be offset by higher volume as credit cards are used for smaller purchases,” he says.
With their large market share “in an industry which is likely to generate huge amounts of cash—credit-card processing,” Mastercard and Visa are good long-term investments, says Peter Cohan of Peter S. Cohan & Associates.