Visa, MasterCard: Dog-Day Financial Losers

NEW YORK ( TheStreet) -- Visa ( V) and MasterCard ( MA) were the financial losers on Monday, with shares of both processors sliding 2%.

Shares of Visa closed at $175.00, while MasterCard closed at $615.18.

The broad indices ended mixed, with the biggest splash of the day being the agreement by Amgen ( AMGN) to acquire Onyx Pharmaceuticals ( ONXX) for $125 a share, or roughly $10.4 billion in cash. Investors were pleased with the deal, sending Amgen's shares up 8% to close at $113.75, although shares of Onyx were up only 6% to close at $123.49.

Monday's economic calendar was light. The Commerce Department said U.S. durable goods orders declined during July by $17.8 billion, or 7.3%, for their sharpest drop since August 2012. The July decline broke a three-month streak of increases.

The KBW Bank Index ( I:BKX) was down 1% to close at 64.38, with 24 index components seeing declines except for M&T Bank of Buffalo ( MTB), which was up slightly to close at $118.54.

Shares of JPMorgan Chase ( JPM) pulled back 1% to close at $51.80, after Rafferty Capital Markets analyst Richard Bove cut his rating on the bank to "hold" from "buy," while lowering his price target for the shares to $57 from $60.00. Bove cited "clear risks to company earnings as a consequence of the government vendetta" against the company.

According to JPMorgan's second-quarter 10-Q filing, there are six separate investigations by the Department of Justice against the company, along with four investigations by the Securities and Exchange Commission and three by the Commodities Futures Trading Commission.

Despite setting earnings records over the past three years, JPMorgan's headline risk is holding its shares to the lowest valuation among the "big four" U.S. banks, which also include Citigroup ( C), Bank of America ( BAC) and Wells Fargo ( WFC):
  • At Monday's close, JPMorgan's shares traded for 8.5 times the consensus 2014 earnings estimate of $6.11 a share, among analysts polled by Thomson Reuters.
  • Shares of Citigroup closed at $49.60 Monday and traded for 8.9 times the consensus 2014 EPS estimate of $5.57.
  • Bank of America closed at $14.49 and traded for 10.5 times the consensus 2014 EPS estimate of $1.38.
  • Wells Fargo's shares closed at $42.39 and traded for 10.5 times the consensus 2014 EPS estimate of $4.02.

Payment Processors

Visa and MasterCard are both valued highly by the market, because of their stellar track records for growth. Visa's shares trade for 19.7 times the consensus fiscal 2014 EPS estimate of $8.90, while MasterCard trades for 20.1 times the consensus 2014 EPS estimate of $30.68.

The payment processing scene is quite unsettled at the moment, after U.S. district court judge Richard J. Leon in Washington ruled on July 31 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."

Judge Leon was referring to the Fed's implementation of the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Durbin requires caps on the interchange fees charged by banks to process debit card purchase transactions for merchants. The Durbin Amendment also requires greater choice for merchants on which transaction network to use.

The judge believes the spirit of the Durbin Amendment was to require merchants to have a choice of payment network for each debit card transaction, rather than for each debit card. If Judge Leon's ruling survives the announced appeal by the Federal Reserve, it will cause a huge changeover by banks and merchants, because some debit cards are only coded for use on one network.

With a roughly 71% market share for debit card purchases, Visa has the most at stake from Judge Leon's ruling. Visa's shares have dropped 8% since July 31, while MasterCard's shares have risen 2%.

Visa's underperformance following Judge Leon's ruling prompted KBW analyst Sanjay Sakhrani on Aug. 14 to call the event a " buying opportunity" for investors.

"We believe the Fed appeal can be won," Wells Fargo analyst Timothy Willi wrote in a note to investors on Friday, adding that the regulator "should be well prepared to defend their decisions," on how to interpret the language of the Dodd-Frank legislation.

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-- 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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