Visa, MasterCard and the Power of Plastic

By Nate Matherson of Circa Alpha

NEW YORK (TheStreet) -- I just want to say one word to you: plastics. As in American Express (AXP), Discover Financial Services (DFS), Visa (V) and MasterCard (MA).

As we progress through yet another earnings season I want to look at the earnings in one of my favorite industries, payment processing and card services. This sector gives us a unique insight into both the financial and consumer discretionary sectors, which may be on the rise.

Over the last couple weeks. all of four companies have reported earnings. In this article I would like to review some key pieces from each of these reports while offering company-specific and industry analysis.

American Express reported 2013 operating earnings per share of $1.25, comfortably surpassing both the consensus estimate of $1.22 and the year-ago quarter's $1.09 a share. Global card spending bolstered the company's net income from operations by 9% year over year to $1.37 billion, from $1.25 billion in the third quarter of last year. Card spending rose by 7% year over year to $236.2 billion a result of international cards-in-force gains of 7% and cards-in-use gains of 8% in the United States.

American Express registered 6% growth on the top line as due to strong growth in card spending, gains in net interest income and the loan portfolio portfolio. Delinquency rates stabilized while provisions for losses were $492 million, up 3% from $479 million in the third quarter of last year. Total expenses increased 5% year over year to $5.81 billion in the reported quarter as expense related to the company's famed card member rewards program rose 8%. Expenses related to professional services jumped by 15%.

I want to focus on the 43% net income gains seen within the Global Commercial Services revenue segment. Higher spending by corporate card members and growth in business travel commissions and fees allowed the company to bolster revenue. Improving revenue from the company's business customer signals, I hope, a turnaround in corporate spending, a key revenue segment for many companies across a number of sectors. Moreover, higher corporate spending signals higher corporate confidence meaning stronger perceived economic strength.

Then there's Discover. Since it was spun off in 2007 by Morgan Stanley (MS), the company has successfully diversified. Acquisition and innovation have taken the company into student, home and personal loans with much success. Over this time, Discover has remembered its origins and continued to make progress within its core processing and lending segment.

Discover's total revenue, net of interest expense, increased 2.8% year over year to $2.06 billion. The improvement came on the back of Discover card sales volume growth from its portfolio of clients. Moreover, the company reported its net interest income improved by 8.8% year over year to $1.51 billion, driven by strong loan growth and higher net interest margins.

Total loans improved by 5% year over year to $62.7 billion, helped by a 4% increase in credit card loans. Strength was felt across all line of the company's loan portfolio. Discover was able to generate a 5% increase in private student loans and a 26% jump in personal loans.

Meanwhile, MasterCard has positioned itself second in the U.S. plastic market with 26% market share in payment volume. However, during the company's third quarter it was the company's oversees segment that shone. The company announced its net income rose to $879 million, or $7.27 per share, from $772 million, or $6.17 per share, last year. On the top line MasterCard generated a 16% rise in revenue to $2.22 billion for the three months that ended Sept. 30.

Excluding the company's U.S. results, the dollar amount people spend using MasterCard-branded cards rose by nearly 19% on a local currency basis. The international results greatly outperformed the domestic market segment, which only saw spending increase by 10%.

MasterCard was able to beat analysts' expectations on both the top and bottom lines. The experts on Wall Street were expecting only $6.94 per share and on revenue of $2.14 billion. Going forward, the Street will be keeping its eye on the company's international growth. Sustained high levels of growth in the emerging and international segment could allow the company to form another foothold position.

Finally, with 48% market share of total payment volume in the U.S., Visa dominates the credit card landscape. Visa reported earnings of $1.85 per share, or $1.2 billion, an increase of 20% and 15% over the same period's adjusted results in 2012. Total operating revenue rose by 13%, driven by strong gains in its service. Data processing rose by 17% while international transactions revenue rose by 12%.

On the top line the company reported revenue at $2.9 billion, up 8% over the fourth quarter of last year. While its key business segments saw revenue improvements greater than 10%, revenue was only up 8% due to an increase in client incentives. This line item acts as a contra-revenue item and grew from $563 million to $680 million, a gain of more than 20%. Shares of the company tumbled following the quarter but have since recouped the majority of these losses.

Wrap Up: While most of the financial sector has run substantially to the upside over the last year, credit cards seem to be performing well. Over the long term I believe each of these companies can perform well within their respective spaces. American Express stands to benefits from a renewal in corporate spending. Discover will carry its customers into its full line of offerings. MasterCard is doing damage in the international market while Visa continues in its powerful position here at home.

At the time of publication the author was long AXP and DFS.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Nate Matherson is currently a student at the University of Delaware, where he is pursing degrees in Finance and Economics. Nate manages his own investment portfolios in addition to writing investment analysis articles for a variety of news outlets. In the future, Nate would love to work in either the portfolio management or investment banking industry.

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