Stock showdown: Visa vs. MasterCard

Warren Buffett's Berkshire Hathaway paid $60 million for MasterCard shares in the first quarter. But was it the best possible bet in the global payments space?

By MSN Money Partner May 19, 2011 11:35AM

By Lou Basenese, Seeking Alpha

 

The latest batch of Securities and Exchange Commission filings reveals Warren Buffett's newest object of affection: MasterCard (MA).

 

At the end of March, Buffett's Berkshire Hathaway (BRK.B) held 216,000 shares, worth about $60 million. This news will no doubt trigger a wave of copycat buying.

 

But don't be so quick to join in.

 

Dare I say it, but the Oracle of Omaha isn't infallible. And in this case, it's possible that a better investment exists in the credit card space -- like Visa (V), for example.

 

So let's pitch MasterCard against Visa in a stock showdown in order to invest with prudence and facts, not simply blind faith in Buffett.

 

So let's use the following eight categories to see how Visa stacks up against Buffett's new favorite stock.

Market share:Advantage Visa

 

Based on total volume, transactions and cards issued, Visa outclasses all  competitors. It boasts a worldwide market share of 63%, according to the Nilson Report. MasterCard comes in a distant second, with about 31%.

 

Given such a formidable lead, it's unlikely Visa will be dethroned.

 

Business and growth opportunity:Draw

 

For years, the ways consumers and businesses pay for goods and services has evolved. Simply put, cash is out, and credit and debit are in. This transition isn't over, though.

 

Emerging markets, in particular, remain grossly under-penetrated. Plus, a new growth frontier is emerging with mobile payment applications.

 

A survey by market research firm, GfK, pegs eBay's (EBAY) PayPal as the biggest beneficiary of the mobile trend. But Visa and MasterCard are next on the list.

 

Add it up and both companies possess an equal opportunity to grow as we become a cashless world. The numbers back that up, too. In the last quarter, Visa's revenue and earnings increased 14.6% and 23.6%, respectively. Meanwhile, MasterCard's revenue and earnings increased 14.8% and 23.5%, respectively.

 

Moving forward, analysts expect Visa to grow its earnings by an average of 18.9% over the next five years, compared to 19.6% for MasterCard. Talk about an even fight.

 

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Credit risk:Draw

 

Unlike credit card issuers like American Express (AXP) and Discover Financial Services (DFS), Visa and MasterCard don't take on credit risk. They simply get paid a fee to process transactions. So both are equally immune from deterioration in consumer credit.

 

Litigation risk:Advantage Visa

 

The credit card industry is highly litigious. In recent years, the fees charged by credit card issuers have come under increased regulatory, legal and legislative scrutiny. And while both companies are equally exposed to new claims, a key difference exists.

 

When Visa went public, in 2008, it funded a $3 billion escrow account to cover any litigation arising from operations prior to its IPO. MasterCard didn't set up a similar fund when it went public, in 2006.

 

Ultimately, MasterCard provides less protection against litigation and should be viewed as a riskier investment.

 

Balance sheet:Draw

 

In a word: Pristine. Both companies carry less than $50 million in debt and roughly $4 billion in cash.

 

Momentum:Advantage MasterCard

 

We're in a bull market, so we can't ignore momentum. And MasterCard clearly takes the crown for trending in the right direction. Shares are up 32% over the past year, compared to a mere 4% rise for Visa.

 

Profitability:Advantage MasterCard

 

Return on equity (ROE) is one of the most important profitability metrics; it's well-known that Buffett insists on companies with a ROE of at least 15%.

 

So it's clear why he opted to buy MasterCard. The company boasts a ROE of 43.3% over the last 12 months, compared to Visa's ROE of 13%.

 

Valuation:Draw

 

You know the drill: "Buy low, sell high." And in this case, both companies are attractively priced, trading for roughly 14 times forward earnings.

 

If one company paid a high dividend, we could argue that it's more attractive based on the income it could generate while we wait for the stock to appreciate. But Visa and MasterCard both yield next to nothing (0.8% and 0.2%, respectively).

 

Final score: Visa: 2, MasterCard: 2, with a tie in four categories.

 

Bet on the best in class

 

Visa and MasterCard are about as evenly matched as possible. An investment in either appears equally compelling. But this isn't cricket and I didn't get all the way to the end of this column just to call it a draw.

 

As the clear market leader, and with more built-in protection from litigation risk, I'm convinced Visa represents a bluer-chip investment. And the fact that shares have lagged MasterCard's, despite putting up similar growth numbers, could mean it's poised for a rally.

 

Since I'm a contrarian at heart, I'd bet against Buffett and go for Visa.

 

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