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Friday, February 14, 2014

Visa vs MasterCard


Visa and MasterCard don’t issue credit cards
Many people may confuse, Visa and MasterCard did not issue the credit card. Actually, the company make money from processing payment transaction between the point of sale (POS) and the bank. They have nothing to do with your interest rates, reward program, late charge and customer service issues.

$100 Payment on Credit Card Transaction Breakdown
When you spend $100 purchase, $98 goes to merchant, $1.50 goes to issuing bank, $0.35 goes to processor, hardware provider and merchant service provider (MSP), only $0.15 goes to card network company.


Duopoly 
Visa and MasterCard are both widely accepted in over 30 million cash machines and 170 countries worldwide and it is rare to find a location that will accept one and not the other. Visa and MasterCard dominate more than 80% global transaction, 50.1% and 33.5% respectively. Not only credit card payment service, the debit card transactions are also via Visa and MasterCard network, total 95.8% of global debit card transaction.


Visa or MasterCard, which should I choose?
Which credit card network to choose? Visa and MasterCard are pretty similar.  Since the rewards and benefits are determined by the issuing bank, ultimately it is the issuing bank that controls.

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Financial Result
I will compare the FY 2013 financial result of both Visa and MasterCard.

Let start with revenue, Visa recorded $11.78 bn by grew 13.02%, MasterCard reported $8.35bn by grew 12.92%.  Visa is slightly higher growth than MasterCard

Then look at the operating margin of both companies. Visa performs $7.22bn operating income, which is 61.29%. However, MasterCard reported operating income $4.5bn which is 53.89%.  Visa wins in second round with better operating efficiency.

We go net profit margin between both companies. Visa has net income of $4.98bn, and MasterCard has $3.12bn. Visa wins again here as its net profit margin of 42.3% which is substantially higher than MasterCard 37.3%.

We move to compare growth rate past 5 years.  Visa grew EPS from $2.79 (2009) to $7.59 (2013) by 54%p.a.  MasterCard has EPS from $1.12 (2009) to $2.56 (2013) by 46%. Visa has another score on growth.

Both companies are giving dividend every quarter. Visa paid total $1.32 in FY2013, MasterCard paid total $0.21 (Note: based on estimated, Q4 dividend is not yet to announce, and share split 1:10 on 22 Jan 2014). Visa wins by yield 0.67% compare to MasterCard 0.2%.

How about the valuation ratio of both companies
Visa:
Valuation Ratios
Price/Earnings (TTM)28.31x
Price/Sales (TTM)11.15x
Price/Book (MRQ)5.21x
Price/Cash Flow (TTM)24.47x
TTM = Trailing Twelve Months 
MRQ = Most Recent Quarter

MasterCard:
Valuation Ratios
Price/Earnings (TTM)29.79x
Price/Sales (TTM)10.92x
Price/Book (MRQ)12.18x
Price/Cash Flow (TTM)27.01x
TTM = Trailing Twelve Months 
MRQ = Most Recent Quarter

Price/Earning and Price/Sales ratios of Visa and MasterCard are close to each other. However, Price/Book value of Visa is 5.21x much lower than MasterCard's 12.18x. Visa is seem worth than MasterCard.

Conclusion
Based on all metrics above, the winner is VISA.

Disclosure
I have long position in Visa. I wrote this article to express own opinions. When you are investing kindly to consult your financial adviser.

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