Visa, MasterCard Called 'Buys' After Debit Rule
NEW YORK (
) --
MasterCard
(MA) - Get Report
and
Visa
(V) - Get Report
shares nosedived Thursday afternoon after the
Federal Reserve
released proposals to address debit card interchange fees and network exclusivity agreements.
However, several analysts said that the selloff of the two large payment networks was overblown and that, for the most part, the stocks should still be bought.
|
The Fed disclosed Thursday two proposals for
lowering debit interchange fees
under the Durbin Amendment, each of which would cap the fee at 12 cents.
Additionally, observers say the Fed proposals, of which they are encouraging public comment on, was less clear about how it plans to alter network exclusivity rules for the payment firms.
MasterCard shares sank 10% on Thursday on strong trading volume of 9 million shares. The stock was falling an additional 0.4% to $222.56 Friday morning. Visa shares plunged nearly 13% on Thursday on volume of about 50 million shares - more than 10x the average daily trading volume in the stock. Visa shares were rising 0.9% to $67.76 shortly before 10am EST.
While the interchange fee proposals will be felt much more so by the banks, especially regional banks like
TCF Financial
(TCB)
, investors sold off the payments firms stocks in droves following the news.
The Fed's debit interchange proposals, if passed, could cut debit interchange fees by 70% -- higher than the expected 40% to 50% reductions. But investors were also nervousness due to the lack of clarity surrounding the networks exclusivity rules within the proposals, something that could potentially cut into network fees gained by MasterCard and Visa.
Deutsche Bank analyst Christopher Mammone reiterated his buy rating on Visa on Friday.
"Although the market had a right to be disappointed with the first draft of the rules, we think the sell-off in the network stocks was overly harsh," he writes. "While ongoing uncertainty could cause further near-term volatility, we think the risk/reward looks compelling at these levels, particularly so for Visa as we think the market is underestimating future growth potential and overestimating any adverse reaction from new debit rules."
Mammone adds that Visa "now surprisingly trades at a P/E discount to MA (- 1%) on 2011 estimates, which we think is unsustainable, and should work its way back towards a 15% premium which we think is more appropriate, so we recommend a 2/3 weighting toward V."
Mammone has a buy rating on MasterCard.
James Friedman of Susquehanna Financial Group trimmed earnings estimates on both MasterCard and Visa but kept positive ratings on the companies.
MasterCard derives only 10% of revenue via domestic debit. The card company is much more internationally focused. Visa derives 20% of its revenue from domestic debit, he writes.
Friedman trimmed 2011 Visa earnings estimates by 5% to $4.57 and 2012 estimates by 5.5% to $5.09. He cut 2011 MasterCard earnings estimates by 2.5% to $16.20 and 2012 estimates by 2.5% to $19.20, due to is lower reliance on U.S. debit business.
He also lowered 12-month target prices Visa and MasterCard to $87 and $267, respectively.
Goldman Sachs analysts removed Visa from its "Americas Buy Conviction List" and rates it a neutral due to the regulatory overhang, in a note Friday. The analysts rate MasterCard at buy/neutral, according to
Bloomberg
.
"Although the headlines on the proposed interchange reduction appear ominous, we continue to emphasize that interchange is not a source of revenue for MA and V; therefore its reduction does not change our models," Goldman Sachs analysts write in a note to clients.
"While we think that the market sell-off on MA and V shares is overdone, we acknowledge that the near-term uncertainty on signature exclusivity keeps the wall of worry on these stocks in place until the final rules are made available in April 2011," the Goldman Sachs note says.
Despite the near term uncertainty, analysts say that both Visa and MasterCard have compelling long-term cases.
"We expect both networks to benefit from an improved U.S. backdrop for credit (excluded from Durbin), international growth on the back of an emerging/affluent class and increased traction from emerging payments including prepaid, mobile and remittances," Goldman Sachs analysts write.
Goldman Sachs has a 12-month price target on Visa of $93.
-- Written by Laurie Kulikowski in New York.
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