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Visa Can't Match MasterCard on Value

Visa and MasterCard are expected to boost revenue and earnings through next year despite new regulations, but MasterCard shares offer a better deal.

PURCHASE, N.Y. (TheStreet) -- The credit card business has taken some blows during the past two years. As spending evaporated and consumers paid down debt, or simply defaulted on outstanding balances, industry profits disappeared and now new regulations are crimping the industry's ability to jack up fees and alter terms of credit card agreements.

The Credit Card Accountability, Responsibility and Disclosure (CARD) Act that took effect on Feb. 22 bars companies from boosting interest rates on new accounts until a year after it's opened. After that, higher interest rates can only be imposed on new charges and payments that exceed minimums must be applied to balances with the highest rates.

While the regulations are good for consumers, they've dragged down the shares of

credit card companies



(MA) - Get Mastercard Incorporated Class A Report

shares have fallen 21% and


(V) - Get Visa Inc. Class A Report

have dropped 17% this year, while the

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S&P 500

has declined 2%.

However, those declines may have created a buying opportunity for investors. Analysts predict the companies will remain highly profitable despite the new regulations and fears of a double-dip recession springing out of the debt crisis in Europe.

MasterCard and Visa beat earnings estimates in the first quarter and have solid revenue and earnings growth projections from analysts. MasterCard is expected to increase its revenue 9.4% in 2010 and 11% in 2011. Visa bests those numbers with growth of 15% expected in 2010 followed by 14% in 2011. MasterCard's earnings per share are expected to increase 22% this year and 19% in 2011, while Visa is expected to see EPS jump 33% in 2010 and 21% in 2011.

Regardless of international uncertainty, the U.S. consumer is more stable than he has been in a long time. In May, the Conference Board's Consumer Confidence Index reached its highest level since March 2008, indicating that Americans are likely to be more comfortable spending now than at any point during the past two years, which is good news for retailers and credit card companies alike.

For investors, choosing between MasterCard and Visa is a decision of growth versus value. Visa is projected to grow faster, but MasterCard's shares are a better deal.

MasterCard is trading at a discount to the industry with a forward price-to-earnings ratio of 15 versus 23 for the industry and 19 for Visa. MasterCard and Visa have PEG ratios -- a measure of share value relative to growth -- of less than 1, but MasterCard edges out Visa with a PEG ratio of 0.78 versus 0.95 for Visa.

MasterCard shares are also cheap based on cash flow, with a price-to-free-cash-flow ratio of 20 compared to Visa's absurdly high 218.

Both companies have the economy on their side. Investors looking to start or expand positions, should consider buying the stocks if their prices dip this year. Visa offers strong growth potential, but the value bet is MasterCard. We rate MasterCard "buy" and Visa "hold."

-- Reported by David MacDougall in Boston.

Prior to joining TheStreet Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.