Visa, MasterCard growth may outweigh regulations

Thu May 20, 2010 5:44pm EDT

* Visa, MasterCard lost about $13 bln market cap over week

* Investors see market "overreaction" to Senate fee vote

* V shares down 22.6 pct vs. month-ago, MA down 21.6 pct

* Surprise Senate vote triggers network share sell-off

* Investors confident in long-term business model

By Maria Aspan

NEW YORK, May 20 (Reuters) - Credit card networks Visa Inc (V.N) and MasterCard Inc (MA.N) have lost about $13 billion in market capitalization in the past week, but some investors argue that the companies' still-strong growth prospects should outweigh fears about regulation.

Investors' worst fears seemed to be realized a week ago, when the Senate voted to restrict debit card fees. The prospect of such regulation has been a long-standing threat for MasterCard and Visa, whose revenues depend on how much consumers use their cards.

Most analysts and investors had considered such fee legislation unlikely, which made its approval an extra jolt to the market.

"There's a lot of fear, a lot of concern. Probably more than anything else, it's the surprise. People didn't expect this," said David Carr, the chairman of Oak Value Capital Management Inc, which includes MasterCard and American Express Co (AXP.N) in its $200 million worth of assets under management.

Shares of MasterCard have fallen about 21.4 percent in the past month, to close at $205.50 on Thursday. Shares of Visa, which dominates the U.S. debit market and thus would be more affected by the legislation, have lost about 22.6 percent in the past month, closing at $72.82 on Thursday.

But even after the month-long slide in their share prices, Visa trades at about 19 times its 2011 earnings estimates, and MasterCard trades at about 15 times its estimates, relatively high multiples compared with most financials.

The two companies together process about 80 percent of the world's electronic payments, reaping big returns as consumers switch from cash and checks to credit and debit cards.

"In the short-term there may be some impact from any kind of (card fee) caps or reductions, but in the long term ... we don't see a lot of basis" to market fears, Carr said. "It's a fixed-cost operation for the processors, and as they increase volume (of payments) over time, it's very profitable."

OPENING A DOOR?

The slide in Visa and MasterCard shares was accelerated by fears over the pace of the U.S. economic recovery, the faltering euro, and the impact of broader financial regulation, according to investors.

But their primary concern is that the Senate vote on debit fees could open a door to wider restrictions on so-called credit card interchange fees, which account for about a fifth of banks' credit card revenue. They also indirectly boost Visa and MasterCard revenue.

"Unfortunately I think there are just a couple of places where the government, with the stroke of a pen, can dramatically change the profitability of the companies," said James Ellman, president of financial services hedge fund Seacliff Capital.

"If you're willing to believe that the government interference in their business has peaked at this point, (Visa and MasterCard) are great buys," he said. But "if you are concerned that the government has only just started, then unfortunately there could be significant downside risk left in both stocks."

Visa and MasterCard intensified their damage-control efforts this week. Visa Chief Executive Joseph Saunders visited Washington on Wednesday, "to highlight the negative consequences that would result" from the amendment, a Visa spokesman told Reuters. [ID:nN19252495]

MasterCard President of U.S. Markets Chris McWilton told Reuters on Sunday that it had lost "a big battle" with the Senate but planned to redouble its efforts to win the war. On Thursday, General Counsel Noah Hanft said he was in Washington to meet with lawmakers and "to make it clear to them on the House side that the ... amendment is an error." [ID:nN1781278]

AWAITING A BOTTOM

Many analysts remain bullish on the companies.

"It's an overreaction," said Scott Valentin, an analyst with FBR Capital Markets. "It didn't take much to spook investors ... These stocks (are a) good value, but people want to see some stability in the stock price first, so it becomes a self-fulfilling prophecy."

MasterCard has more than quadrupled its share price since its initial public offering in 2006, and Visa has gained about 22 percent since its IPO two years later.

Some of the best-known hedge funds, including Julian Robertson's Tiger Management and Andreas Halvorsen's Viking Global Investors, have been big shareholders of MasterCard and Visa for several years, though they have been reducing their positions over the past six months, according to Thomson Reuters data.

Visa was the fifth-most popular stock and MasterCard 44th most popular held by a group of 30 of the largest equity-oriented hedge funds as of March 31, according to a Thomson Reuters survey of Securities and Exchange Commission filings.

Michael Nix, a portfolio manager at Greenwood Capital Associates, said on Wednesday that he was holding off on buying any more Visa shares at the moment.

"I want to see a couple of days of stabilization," he said. "When you see this type of volatility, there can be a couple of headaches when it comes to finding a bottom." (Reporting by Maria Aspan; additional reporting by Aaron Pressman, editing by Matthew Lewis)

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