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Visa IPO Seeks MasterCard Riches

Despite consumers' credit troubles, MasterCard's success as a public company is a good sign for its rival.

MasterCard

(MA) - Get Mastercard Incorporated Report

once again reported blowout earnings last week, bolstering predictions of a smooth ride for the much-anticipated IPO for its rival Visa.

Observers say Visa could go public sometime in the second half of the year, despite some market chatter that the offering date could be put on hold or that the pricing could be lower than observers initially hoped for, due to the general malaise in market conditions and concerns about the stalling consumer.

But while consumers seem to be struggling with payments on everything from cars to mortgages these days, it's clear that their use of plastic has not diminished -- and likely won't.

"For investors, this is the perfect time to be considering purchasing this stock," says David Menlow, president of IPO Financial Network, based in Milburn, N.J. "I'm not concerned the talks of consumer problems is going to be a detriment to the market. If you look at

consumers' tendency to live on their credit cards when times get rough that may in fact be an offset to some degree. I don't believe that people are going to want to miss another MasterCard."

Visa plans to list the stock under the symbol "V" on the

New York Stock Exchange

. While the company declined to comment for this story and few details have been made public so far regarding the initial public offering, Visa expects to raise up to $10 billion, according to the preliminary registration statement filed with the

Securities and Exchange Commission

.

The IPO's expected success has helped attract an impressive list of underwriters, including J.P. Morgan Chase and Goldman Sachs in the lead and Banc of America Securities, Citigroup, HSBC, Merrill Lynch, UBS and Wachovia also taking part in the action.

San Francisco-based Visa operates the world's largest retail electronic payments network. Visa-branded cards that are accepted in more than 170 countries around the world, according to its annual report filed in December. The company plans to hold a special shareholder meeting this week. It is proposing that shareholders approve an increase in total authorized capital by 360 million shares in preparation for its IPO.

Because credit was tossed around so freely over the past few years, many homeowners refinanced existing mortgages or took out home equity loans to pay off escalating credit card bills. Now that banks and mortgage lenders are tightening credit standards as a result of the credit crunch, consumers are finding it harder to pay other bills as well.

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But Visa and its biggest rival, MasterCard, are largely immune to the troubles.

"What makes MasterCard and Visa somewhat strong is that they are extremely diversified in terms of international presences ... They don't have their eggs on one national basket," says Red Gillen, a senior analyst with Celent, a financial research and consulting firm.

"People like the convenience of the cards," Gillen adds. "Transactions are moving downstream a little bit. People are using

cards for $5 transactions. What the major payment card brands are trying to do is to go deeper into transaction sizes to get smaller ticket payments -- where cash is still used today -- and convert that into cards."

More importantly though, neither company keeps consumer debt on their balance sheets, as opposed to rival

American Express

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, which was forced to set aside a large provision for loan losses last quarter as consumers began having trouble paying not only their home loans but their credit card bills and auto loans.

Visa and its member banks agreed in November to settle a long-running legal dispute with American Express by consenting to pay up to $2.25 billion to the New York card and travel services giant. Amex had alleged Visa, MasterCard and member banks -- including

U.S. Bancorp

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,

Wells Fargo

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,

Washington Mutual

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,

JPMorgan Chase

(JPM) - Get JP Morgan Chase & Co. Report

and

Capital One

(COF) - Get Capital One Financial Corporation Report

-- blocked it from entering the bank-issued credit card business in the U.S.

But while some of those financial institutions have reported problems related to consumer credit, MasterCard has fared much better.

MasterCard surged 15% on Thursday after posting a quarterly profit that was seven times higher than the year-earlier period, beating analysts' estimates. The stock, which priced at $39 a share during its own IPO in May 2006, is trading above $200. Shares rose an additional 4.1% on Friday.

In the final three months of the year, the Purchase, N.Y.-based MasterCard reported net income of $304 million, or $2.26 a share, compared with $41 million, or 30 cents a share, in the year-earlier quarter. While last quarter's results included an after-tax gain of $185 million, or $1.37 a share, from additional sales of MasterCard's investment in Brazilian credit card processor, Redecard S.A, revenue rose 28% to $1.07 billion.

Fueling revenue growth was MasterCard's surge in gross dollar volume to $634 billion, up 15%, while the number of transactions processed rose 17% to 5.2 billion, it said.

MasterCard's "magnitude of EPS upside was a positive surprise to the market, as was the realization that with these numbers, there really are no signs that a slowing U.S. consumer is impacting the model negatively at this time," writes Christopher Mammone, an analyst at Deutsche Bank. "We think the shares could continue to outperform as Street numbers are likely to go materially higher after this print, and so we are raising our price target to $250."

CEO Robert Selander acknowledged during a conference call that while revenue growth will likely slow this year, "a mix shift in consumer spending" is actually helping the business.

"Over the past several months, consumers have moved away from discretionary items such as jewelry, full-service restaurants and home furnishings toward everyday purchases including gasoline, grocery and personal health care items," Selander said. "This movement to everyday purchases aligns well with where MasterCard is broadly positioned in consumers' wallets. For us, the shift in spending patterns has translated into higher fourth quarter."

Which is good news for Visa, too. Gillen says the trend to smaller and more diverse transactions will "only continue," and any downturn in the economy would likely be "a temporary hit."

"Long term, the prospects are very good for both organizations," he says.