Buy Visa After Durbin Drubbing: KBW

NEW YORK ( TheStreet) -- It's time to load up on shares of Visa ( V), according to KBW analyst Sanjay Sakhrani.

Visa's shares closed at $178.35 Wednesday, down 7% since July 30, which was the day before U.S. district court judge Richard J. Leon in Washington ruled that the Federal Reserve had "clearly disregarded Congress's statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit transaction."

Meanwhile, shares of MasterCard ( MA) rose 5% since July 30, to close at $629.98 Wednesday.

Judge Leon ruled against the Federal Reserve's final rules on the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which were implemented by the regulatory during the fourth quarter of 2011.

The Durbin Amendment requires caps on interchange fees charged by banks to process debit card transactions for merchants, and also requires "non-exclusivity" for the network processing the transaction.

The Federal Reserve's interpretation of the Durbin Amendment calls for merchants to have a choice on which network to use to process a debit card purchase, but only if the customer is required to use a PIN number at the point of sale.

In his ruling, Judge Leon wrote "First, the interchange transaction fee and network non-exclusivity regulations are fundamentally deficient. It appears that the Board completely misunderstood the Durbin Amendment's statutory directive and interpreted the law in ways that were clearly foreclosed by Congress."

The Judge's interpretation of Durbin is that merchants should be able to choose the processing network for each debit card purchase, whether or not the customer uses a PIN.

If Judge Leon's opinion on non-exclusivity for transaction networks sticks, it can only mean good news for MasterCard and bad news for Visa.

"Visa has more to lose than gain since it has 71% share in signature debit versus MasterCard at 29% in the U.S," according to JPMorgan analyst Tien-tsin Huang. "Assuming competition results in shift to 50/50 share and pricing stays rational, we conservatively see $540M of revenue that could shift from Visa (6% revenue hit or ~$0.51 in EPS) to MasterCard (9% revenue benefit or ~$2.74 in EPS)," Huang wrote in a July 31 note to clients.

But Sakhrani has a rosier view of Visa's prospects. After meeting with Jack Carsky, Visa's head of investor relations, the analyst in a note on Wednesday wrote "We came away believing investors should use the recent relative weakness in V shares as a buying opportunity."

"There is no doubt that if dual badging is allowed for signature debit, this would lead to a diminution of Visa's premium real estate on the majority of debit cards in the market; however, there is no certainty that a similar phenomenon would be seen in terms of volumes," Sakhrani added, citing the difficulty and costliness for merchants to "make dual badging on signature possible."

After all, if Judge Leon's decision on non-exclusivity holds, it's perfectly reasonable to expect some merchants to elect not to make the systems enhancements needed to allow them network choice for every single transaction.

Sakhrani backed up his view by pointing out that "the current plastic cards do not support having two card accounts on the magnetic stripe that is swiped at point of sale terminals. Given the lengthy timeline for implementation due to current technological challenges, it begs the question as to why it wouldn't make more sense to look towards the EMV conversion as being a means of compliance given chip technology is able to support dual signature bugs on one card."

In other words, merchants, banks and even customers would have quite a bit of legwork to do, before Visa were to see a major threat to its debit card processing market share from Judge Leon's ruling.

Sakhrani reiterated is "outperform" rating for Visa. KBW's price target for the shares is $217, implying 22% upside for the shares over the next 12 months. He estimates Visa will earn $7.61 a share during fiscal 2013, which ends on Sept. 30, with EPS rising to $8.88 in fiscal 2014.

Shares of Visa were down 2% in early trading Thursday to $174.99, while MasterCard was also down 2%, to $618.75.

V Chart V data by YCharts

Interested in more on Visa? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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