V Return on Equity (TTM) data by YCharts .
From a growth perspective, Visa's numbers are far better than Discover's. However, I see this as much as a reflection on the different business models as anything else. Discover's growth must be more conservative, or else it risks lowering its credit standards to a point that could cause the company severe long-term harm if the economy faltered. Its higher leverage also adds additional risk that requires prudence over growth. Visa has no such constraints, allowing it to aggressively pursue innovative growth strategies with little concern for credit risk.
V Revenue (Quarterly) data by YCharts .
Visa's business model earns it a much richer valuation compared to Discover
Visa and Discover make money for their investors in different ways, and because of that, the market values each differently. While they're not quite as different as apples and oranges, comparing their valuations side by side is not a very helpful exercise. Visa currently trades at 34 times its trailing 12-month earnings, compared to Discover's 10.6 times.
Visa's valuation is so much higher for many of the reasons already discussed here. The company's returns on equity are better, it is growing faster, and it has better margins. That alone doesn't mean the stock is a better investment -- it just means that the companies are different.
A better comparison for Visa is MasterCard (NYSE: MA) , which has a comparable business model and trades at 28.7 times its trailing 12-month (TTM) earnings. For Discover, a more direct comparison would be American Express (NYSE: AXP) because of its hybrid lending-payment processing model. American Express trades at 11.3 times TTM earnings.
Data source: YCharts
In both cases, each stock is valued similarly to its closest peer, with each having pluses and minuses in terms of growth, returns, and value. The valuation of neither Visa nor Discover appears to be grossly off base.
So which stock is the better buy, Visa or Discover Financial Services?
Taking into account each company's business model, financials, and valuation, I think that Visa is the better buy.
I think that Visa's "toll collector" business model is less risky, better suited for rapid growth, and more profitable than Discover's hybrid bank-payment processor model. I also prefer Visa for its lower leverage and the lack of credit risk. Taken all together, these factors justify paying the higher premium and owning Visa over Discover.
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Jay Jenkins has no position in any stocks mentioned. The Motley Fool owns shares of and recommends MasterCard and Visa. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
