Tuesday, February 26, 2008
Discount to Priceless -- Can Visa Make Money?
--Credit-card issuers entice customers to use their cards by promising freebies and cash back. Visa seems to be thinking along the same lines for its initial public offering. The $18.6 billion price tag for half the company values it at a significant discount to rival MasterCard -- 20% or more on a trailing price-to-earnings ratio basis after accounting for Visa's planned litigation reserve. While credit-card businesses have some immunity from credit conditions, a weak economy and tightening by lenders are likely to drag on both card giants' growth. --As intermediaries, Visa and MasterCard get a fee whenever someone swipes their cards. They don't make loans and aren't responsible if a borrower defaults. That is why they aren't exposed to bad loans in the way big banks are. That also is arguably why Visa can press ahead with its IPO in the current environment. --Still, the banks that do issue the cards and extend credit are belt-tightening. Citigroup, the third-largest card issuer, recently reduced credit lines for borrowers in California, Florida and other states where the subprime-mortgage crisis has hit hard. Such moves, together with weakening economic conditions, are likely to crimp consumers' access to credit-card debt, which would naturally slow their spending. --Of course, the U.S. economy isn't everything -- roughly 30% of Visa's business is with non-U.S. issuers. And the use of debit cards, which don't come with credit worries, also is growing. Still, investors in a Visa IPO can't realistically expect the kind of transaction-volume growth that fueled a nearly 400% rise in MasterCard's stock price since it went public in 2006. In that context, Visa's enticingly discounted valuation makes sense.