The Bullish and Bearish Case for Visa in 2014

As the companies are almost identical in all senses, we have to evaluate MasterCard Inc. (NYSE: MA) at the same time to get a better picture. Visa is worth $141 billion in market capitalization, versus about $101 billion for MasterCard.

Visa shares rose by 48% in 2013, well above the 29.6% for the S&P 500 and 26.5% for the DJIA. Visa was also just added to the Dow toward the end of the year.

Macroeconomic factors may matter to Visa more than any other issue. As long as people keep buying things with their Visa cards, the company gets to ring the register. Most Wall Street strategists are forecasting higher price targets for the S&P 500 and DJIA, and the hope is that the rising tide will lift all ships.

The Federal Reserve is about to get a new chairman, and a gradual expected rise in interest rates should not kill Visa. Another boost is that the world markets are exiting their recessions at the same time that U.S. gross domestic product is expected to tick up.

Visa’s current dividend yield for 2014 is still way too low at less than 1%. After closing out the year at $222.68, the consensus analyst price target is closer to $227, and the 52-week trading range is $154.14 to $222.72.

One issue to consider is that Visa shares were up almost 10% in the final month of the year, and the quarter gain was 15.5%. Visa also trades with a high earnings multiple of 21.5 times expected 2014 earnings estimates. That just feels too high, but it is a bargain compared to the 27 times expected earnings in 2014 for rival MasterCard.

Visa has another consideration in 2014, and that is that it could split its shares like rival MasterCard chose to. It has always been amazing that cyber-crime and theft have not hampered the credit card processors and transaction clearing houses. Will that change going forward?

One bright spot about Visa is that the consensus analyst target of about $227 is far under the street’s highest analyst target of $275 for the stock. Shares are challenging new highs almost weekly, so maybe 21 times forward earnings is just the price of poker these days. It sounds cheap against MasterCard’s multiple.