Card Processors Good bet for Long Term? - Visa (V) and MasterCard (MA)

“Visa (V) and MasterCard (MA) shares dropped sharply on Tuesday, as a proposed law to curb debit card fees could cut into transaction volumes. Visa shares fell 7.3% to $69.25 in late New York Stock Exchange trading, and MasterCard shares dropped 6.0% to $198.07, outpacing the S&P 500 Index's midday decline of 1.3%.” Reuters 

With this fall the stocks of V and MA are looking over sold. On a 50-day basis both the stocks are more oversold than any time in the past year. Currently at $72.82 and $205.50, both, Visa and MasterCard  are well below the 50D and 200D EMAs’ (V=15.77% below 50D and 10.71% below 200D; MA=14.50% below 50D and 10.62% below 200D). 

Since the Senate announced the amendments “Visa shares have declined 18% while MasterCard shares are down 13.6%.” Reuters. On YTD (2010) basis, both the stocks have performed negatively. Visa (though recovered) is down 16.57% and MasterCard down 19.72% (as of 21st May). In 2010 both the stocks have lagged behind the S&P 500 Index; where as in 2009, both managed to beat the Index by a wide margin (see chart 1). 

I agree to the analyst’s call that price drop is “overblown”.

Fundamentally, both Visa and MasterCard have a sound business model. They are not exposed to any debut defaults, unlike American Express and Discovery. V and MA receive fees every time a purchaser swaps his/her card on their networks.

In long run, card processors have attractive businesses because of high earning growth, strong cash flows, and the potential to benefit as increasingly high percentages of consumer spending (emerging markets) involve card use.

"The amendment would not directly limit credit card fees, but many fear it could lead to wider restrictions.” Reuters 

But others say that “it is premature to discuss the potential impact of the amendment” Reuters

Chart 1 - Visa and MasterCard Vs S&P 500 in 2009

Factorized to 100, in order to depict the relative performance. 
 

Chart 2 - Visa and MasterCard in 2010

So, are Card Processors good long term Bets?? 

I will be writing another post, detailing the fundamental analysis of the Card Processors in the coming week.  

Till then good-bye and...

Happy Investing !!!