SunTrust Raises Estimates on Mastercard, Sees International Growth Driving Stock

5/27 - "SunTrust is out with a pretty major call on Visa (NYSE:V) reiterating their Buy rating and raising fiscal 2008, 2009 and 2010 EPS estimates and price target. Firm's target is $100, and new fiscal 2008, 2009 and 2010 EPS estimates are $2.11, $2.96 and $3.82, respectively. These compare with prior 2008, 2009 and 2010 EPS estimates of $2.04, $2.69 and $3.55. These sharply higher estimates reflect firm's confidence in Visa's volume growth, pricing power and operating leverage."

"It is firm's view that most analysts have been unwilling to boost their growth forecasts for Visa as the company gave markedly conservative guidance during the IPO process and did not alter its long-term growth objectives following impressive 2Q08 outperformance. Further, while MasterCard has been public for two years, and has consistently posted organic revenue and earnings growth well ahead of its long-term goals, Visa has only beaten expectations for one quarter."

"This has created a situation in which V appears to have a valuation comparable with MA on EBITDA and higher on EPS. They believe the opposite is actually true, however."

6/3 - "The stock popped last week, on positive brokerage remarks. SunTrust reiterated its "buy" rating on the issue and raised its target from $87 to $100, citing solid organic revenue and EPS growth prospects. That sparked a run to the upside in V shares, which was subsequently magnified by word of a bullish outlook from rival Mastercard (NYSE: MA). The move was accompanied by heavy interest in Visa call options, particularly the June $85 instrument.

Visa shares have now begun consolidating the gain in a bullish "flag" pattern. Prices frequently exit flags moving in the same direction they were traveling on entry. In this case, that would be to the upside...A stop-loss of $74.50 looks good here. Note that the firm is next expected to report quarterly results in late July."

5/21 - "...current legislation (could) potentially result in the renegotiation of fees that merchants pay issuing banks, known as the interchange fee. While I’d be far out of line to assess the odds that the bill passes, it’s a worthwhile example to illustrate why American Express is the much better company and – as we’ll see later when looking at valuation – investment."

"Visa and MasterCard...are very much a duopoly in the credit card market, with roughly 80% of the cards in force being one of those two brands. While there are lawsuits by merchants alleging antitrust violations, none have gone to trial as of yet, although a successful verdict against Visa wouldn’t be the first time that company has been hit for anti-competitive practices – Visa was forced to settle a multibillion dollar lawsuit brought by American Express alleging Visa had a long history of preventing banks from issuing rival cards.

The big question, though, is whether the leverage Visa and MasterCard have over merchants is enough to entail government arbitration to the point of setting fee schedules lower. Again, whether or not that happens, or to what extent it does happen, is beyond my knowledge. But there are two adverse possibilities, one being that interchange fees are lowered, and the other being that the fees Visa or MasterCard can charge are lowered...a decrease in the interchange fees would make these cards a much lower-profit enterprise for the issuing financial institutions, and that would incentivize them toward making money on the interest rate side. Raising credit card interest rates would make using credit cards a much less-appealing option for consumers, and this could put a clamp down on the revenues Visa and MasterCard receive."

"None of this is to say that Visa or MasterCard are bad companies – far from it; their model has very positive operating leverage, they should benefit greatly from marginal shifts from cash to plastic, and the lack of huge capital commitments puts most other industries to shame. But are these companies worth fairly high multiples given their existing size and scale? I think it’s going to be a real contest for earnings growth to outpace multiple compression over the intermediate-term, and given how hot Visa and MasterCard have been of late, the prudent thing to do is be cautious… or even look at the unloved stock with the best underlying economics in the space – American Express."