Visa Inc (NYSE: V ) finds itself in a unique position. Along with archrival Mastercard Inc (NYSE: MA ), it's a financial transaction processing company poised to capitalize as society becomes increasingly cashless.
Visa has increased its market share to the point that it's much larger than Mastercard. However, with earnings growth and appreciation figured into the price of Visa stock, investors must decide if V is still a buy.
Interestingly, the Foster City, California-based company does not issue debit or credit cards. Visa acts as a financial processing company. It provides the financial products to facilitate credit, debit or other transactions under the Visa brand. Over 44 million locations throughout the world accept Visa-branded cards.
Moreover, as the world becomes more cashless, more transactions will be processed by Visa.
Visa Took Over Costco's Credit Card Transactions
Visa is already the second-largest financial processing company in the world. It is surpassed only by China Union Pay, which operates primarily in China. V maintains a 50% market share excluding China.
Visa's share in the U.S. is roughly the same at 52.5%. This represents more processing volume than its three main rivals combined. The market share also represents huge growth. Mastercard had higher revenues than Visa as late as 2007.
Regarding customer acquisition, Visa acquired a large client last year when it became the exclusive credit card accepted by Costco Wholesale Corporation (NASDAQ: COST ). Visa took this business from rival American Express Company (NYSE: AXP ).
V stock has reaped the benefits of this increased business. Visa fell to a split-adjusted low below $11 at the height of the 2008 financial crisis. Today, Visa stock trades at record highs around $105 per share.
V Stock Has a P/E That Rises Along With Earnings
Further, revenue increased about 50% over the last five years, and net income has more than doubled in the same time. Diluted earnings came in at 79 cents per share in 2012. In 2017, analysts are predicting earnings of $3.42 per share . They further predict earnings will rise more than 15% per year over the next two years.
The bad news for investors is that the growth has likely been figured into the Visa stock price. It will not be acquired at a bargain. V stock trades at a price to earnings (P/E) ratio approaching 40. Compare this to Mastercard, which trades at a P/E of 35.
American Express Could Be a Lower-Cost Option
American Express, a favorite of Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK.A , NYSE: BRK.B ) has a current P/E of about 21. In fact, Berkshire recently applied for permission to acquire up to 25% of AXP . Mr. Buffett shows a clear preference for American Express in this industry. However, analysts expect earnings growth to be slower than that of Visa, coming in at about 11% per year.
Moreover, AXP pays a higher dividend yield than V. Both stocks have increased dividends annually over the last few years. AXP's dividend yield stands at about 1.5%. Both Visa stock and Mastercard stock produces a dividend yield of just over 0.6%.
The world is moving away from cash, and with Visa increasing its market share, V has proven itself to be the industry's best stock.
However, AXP trades at less than half of V stock's price from a P/E perspective and pays a larger dividend yield. With Warren Buffett's backing, AXP appears more attractively priced than V stock. Still, with its earnings growth and consistent market share increases, the future looks bright for Visa stock.
As of this writing, Will Healy did not own a position in any of the stocks mentioned here.
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