* 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 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
"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
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
"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
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
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
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
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)