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Visa And MasterCard Rekindle The Credit Card Fetish

Posted
11/15/2013 4:25:00 PM
By: Investor's Business Daily
Referenced Stocks:ADS;AXP;FLT;MA;V

It's an interesting sign of the times: After 20 years of losing market share to debit cards, credit cards are making a comeback.

According to the payment-industry newsletter the Nilson Report published Tuesday, credit cards accounted for 52.82% of U.S. card-based spending in 2012, up about 0.2% from the previous year. Debit-card share declined by a similar amount, to 47.18%. Granted, 2012 was a while ago, but Nilson projected the trend to continue, with the credit share seen reaching nearly 55% by 2017.

The two formats allegedly aren't fighting for a shrinking pie. Overall payments through credit, debit and prepaid cards are forecast to grow 57%, to $7.285 trillion, over the same period.

So far in 2013, that optimism has certainly been supported by the stock market. Shares ofMasterCard ( MA ) hit a new lifetime high above 750 on Friday, up 53% from where it started the year.Visa ( V ) is up about 33% year to date, andAmerican Express ( AXP ) has gained about 44%.

Related stocks are also doing well.Alliance Data Systems ( ADS ), which manages store-brand credit cards for retailers, is currently sporting a highest-possible IBD Composite Rating of 99.

IBD 50 stockFleetCor Technologies ( FLT ) is trading just below its high, up 120% so far this year. It handles credit and financing challenges for corporate vehicle fleets.

On the darker side for consumers, debt-collection specialistPortfolio Recovery Associates (PRAA) is up 59% year to date.

Overall, these stocks have helped drive IBD's Credit Card/Payment Processors industry group into the top 30 of 197 groups.

Charging Global Markets

Consumers like credit cards for a very simple reason. According to a statement from Nilson Report publisher David Robertson, the rising popularity of credit owes to a basic consumer calculus.

"Because they can borrow money and pay it back over time, they can spend more on credit than they have in their own accounts."

Of course, spending money you don't have has always been fun. But that way of life became more difficult after the 2008-2009 financial crisis. In addition to putting many consumers off credit cards, that event also brought on a host of new regulations for lenders, the implications of which are still unfolding.

U.S. consumer spending has been slowly recovering. But industry watchers say that two longer-term larger trends are driving the industry.

"I still absolutely love Visa because they sit at the crossroads of two long-term themes," Charles Sizemore, head of Sizemore Capital Management, told IBD in an email. "The transition to a cashless society (which is accelerated by Internet and mobile commerce) and the rise of the new emerging-market middle class."

Sizemore says Visa has the most global exposure among the credit-card stocks, although "MasterCard is quickly closing the gap."

There's an international flavor to the top-rated stocks in the group, which includes such players asEuronet Worldwide (EEFT),Global Payments (GPN) andQiwi (QIWI), an electronic-payments operator in Russia and neighboring countries.

FleetCor saw more than 40% of last year's revenue come from overseas markets and is rapidly expanding its international stance. It closed on acquisitions of one fleet credit service operation in the U.K and two in Brazil since July, and has its eye on targets spread from Russia to South America.

Big Data Loves Plastic

Alliance Data Systems and Portfolio Recovery Associates have boomed despite being heavily focused on North America. Both are taking advantage of other trends.

ADS is riding the increasing popularity of store-brand cards. The rise of electronic payments has made it easier for customers to juggle them, say analysts, and stores love them because of their opportunity to leverage consumer data collected online and via card use. ADS's work allows it to not only provide services to customers, but also to gather detailed information on their spending habits.

"Retailers are increasingly shifting the marketing budget toward data-driven marketing activities, which now account for (an average) 25% of the marketing budget," wrote Deutsche Bank analyst Ashish Sabadra in his June initiation report.

ADS programs collect data on purchases by private-label card holders, using it in concert with demographic and psychographic information of about 220 million Americans to allow retailers to tailor inventories and marketing according to very specific targets.

Also benefiting from the trend toward industry-specific cards are FleetCor andWEX (WEX), both of which specialize in transportation.

Twisting Debt Collectors' Arms

Portfolio Recovery Associates might seem to be in a bad spot since consumers are still cautious enough about debt that default rates are at historic lows, and because its industry is under new regulatory scrutiny.

Last week the Consumer Financial Protection Bureau, created in 2011 in the wake of the financial crisis, said it's started working to tighten up laws on debt collectors, after receiving some 5,000 complaints from consumers alleging harassment tactics and inaccurate information.

But industry leaders are in a better position to handle those speed bumps, says analyst Lawrence Berlin of First Analysis.

"The pricing of debt has gone up ... as the CFPB passes more laws and more rules," Berlin told IBD. "That has a larger effect on the smaller debt collectors than the larger debt collectors, but it's had a big effect."

Even when default rates are low, Berlin says, "that's still billions of dollars."

Debt collectors aren't the only ones in the group dealing with regulatory pressure. The Durbin Amendment to the 2010 Dodd-Frank law attempted to cap swipe fees on debit cards, but retailers are still wrangling with the government in court about exactly where those caps should be. Meanwhile, last year's settlement between retailers and card issuers on credit-card fees has fallen through and is back in federal court. The European Union has also been considering a law that would cap fees on both credit and debit purchases.

Morningstar analyst James Sinegal says it's not clear exactly how a cap would affect the group because the fees go to the banks issuing the cards, not to the network operators like Visa and MasterCard.

"When you look back, Durbin was a significant hit to issuers, but it was a temporary hiccup for the networks," Sinegal told IBD.

The View: Not Quite Priceless

What to expect from the near future?

MasterCard CEO Ajay Banga offered a mixed report on consumer spending around the world during his quarterly conference call with analysts on Oct. 31. Consumer confidence in the U.S. was declining (due partly to what Banga delicately called "the recent circumstances in Washington"), but was improving in Europe and stayed mostly steady in Asia, he said. Latin America was a mixed bag, with Brazil on the upswing and Mexico going the other way.

"I think it's going to be a long time before consumer confidence returns to peak levels," Sinegal said. "I think it's generally accepted at this point that the aftermath to financial crises lasts about a decade."

Analyst Berlin was also cautiously optimistic.

"There are no expectations of anything spectacular this holiday season," he said. "But I'm always an optimist. So I expect positive trends to (be) at least good enough to help fuel results for these companies."