Americans love to “charge it”. This is why the darlings of plastic American Express Company (NYSE:AXP), Visa Inc. (NYSE:V), MasterCard Incorporated (NYSE:MA) have made solid investments in the past. In the U.S. credit card debt totaled $865.8 billion in 2009 but ticked down to $800.5 billion last year, thus for Visa, Amex, and MasterCard there is still plenty of money to be made thanks to our spending habits. However, not all credit card companies are created equal and despite Visa’s popularity, its been the worst performing stock of the three in the past 12 months.

Since last February Visa (V) has underperformed both American Express (AXP) and MasterCard (MA) to the tune of -9%, while MasterCard shares gained 14% and American Express increased 23%. If comparing stocks over a year period is to long for your in this volatile trading environment, Visa is still the loser when you look back six or even three months. Worse yet is when you compare Visa’s performance to the major indexes, the Dow Jones has jumped 22% since last year this time, and the S&P 500 is up 25%.

Americans are still charging with Visa, so what gives?

FINANCIAL REFORM – SHRINKING FEES

American Express, Visa, and MasterCard shares took a beating in December after the Fed proposed fees banks charge merchants for each transaction using debit cards could slash up to 90% of the revenue those fees generate. Under the proposal, merchants would be charged no more than 12 cents per debit-card transaction, a huge blow to Visa as the average interchange fees currently run from $1 to $1.30.

Thus, the credit card companies shares fell like faster than a Kardashian card credit scheme gone wrong. Excuse me? I digress, for those of your that missed this now defunct prepaid card opportunity of 2010, let me briefly remind you of some of the fees included:

– Card Purchase (Includes monthly fees for 6 months) $59.95

– Card Purchase (Includes monthly fees for 12 months) $99.95

– Monthly Fee (Applies after initial purchase period) $7.95

– Card Replacement – Primary or Companion $9.95

– ATM Withdrawal – Domestic $1.50

– ATM Inquiry or Decline – Domestic $1.00

The list continues at gawker.com, its beyond ludicrous

If only Visa could apply fees like a Kardashian card credit that could make up the difference for any future legislation that may impact their revenue potential. However, maintaining fees is just part of the problem, both Visa and MasterCard, only issue charge and credit card products but not debit cards, unlike the our winner American Express.

CREDIT CARDS ARE DYING

The U.S. credit card debt totals as noted earlier (which are on the decline) are an indicator that Americans with access to credit have been using their cards less and less. As Doug McIntyre said back in September:

Suppose that the consumer moves away from credit card use in large numbers. The result would be a drop-off in retail activity, at least during the transition from the use of credit cards to cash-based buying. Consumers may start to think twice about their shopping methods. A consumer who considers a purchase based on the ability to pay is a consumer who may decide that the purchase is not worth the risk of repayment at all. The retail industry could be changed forever.

COULD VISA COME BACK?

Thanks to the company’s earnings call this month, Visa has gained back some support from Wall Street when they affirmed expectations of 11% to 15% net revenue growth for fiscal 2011. During Visa’s fiscal quarter it bought back $1.1 billion of stock and have plans to buy another $694 million in authorized funds. They also will be paying a quarterly dividend of 15 cents per share on March 1st, to holders of record as of Feb. 11th.

CO.	Current Price	Target Price	% Change
V	$ 74.93	$ 85.00	13.4%
V	$ 74.93	$ 97.00	29.5%
V	$ 74.93	$ 92.00	22.8%
V	$ 74.93	$ 85.00	13.4%
		Average	19.8%

Goldman Sachs (GS) reacted by increasing their price target on Visa Inc. (V) to $85, and kept their “Buy” rating on the stock. Barclays Capital (BCS) followed suit by upping their price target on Visa to $97. RBC Capital however lowered their price target from $100 to $92 and JPMorgan Chase (JPM) cut their price target on Visa the back in January from $103 to $85. If you take the latest analyst action, that implies the average of return for Visa shares in the next 12 months at around 19.8%.

Visa shares could come back, don’t forget  it had the largest IPO in U.S. history back in 2008 valued at $17.9 billion. However, now that all the hype is over and as we slowly recover from the greatest downturn since the Great Depression, Visa shares don’t have that same appeal as they did back in 2008. By the time most investors had the chance to buy Visa in March of 2008 they were trading around $65, compare that to Friday’s close of $74.93, that works out to a 16.4% increase. MasterCard shares have gained 464% since they went public back in 2006 and America Express has gone on a 1,794% run since 1978. When the greatest IPO of 2008 can’t even beat the Dow Jones or S&P 500 in the past year what does say about their management?

On the Feb 2nd conference call Visa’s CEO Joseph Saunders who’s run the show since 2007 said:

“Visa’s first quarter was a great start to our fiscal 2011 as evidenced by strong earnings fueled by continued growth in payments volume, cross border volume and processed transactions globally – our core business.”

A fine pep talk indeed and after all the analysts weighed in after the call Visa shares have inched up 3.9%. Wall Street may think Visa shares could rally 19.8% on average over the next 12 months, but the trading has yet to demonstrate the price target could be hit.

Question Mr. Saunders: What’s more embarrassing than finding a Kardashian card credit in your wallet? How about losing all your credit cards.

That’s what happened to Joseph Saunders in late 2008 when the market was falling hard:

“I’m supposed to start off, and say that I’m very happy to be here, and I guess I am. But it’s 4:15 in the morning as far as I’m concerned, and I lost my wallet on the way here,” Saunders said. “It’s rather embarrassing when somebody steals my credit cards.” The comment prompted laughter.

DUDE WHERE’S MY CREDIT CARD

Americans aren’t using their plastic like they used to and even if things pick-up, imagine the devastation to Visa’s profit margins if the 12 cents per debit-card transaction becomes a reality. Saunders may have found his credit cards, but most of us have thrown them away. Overall revolving credit, 98% of which includes credit cards, inched up 3% in December to $800.5 billion from $798.2 billion a month earlier, reversing a 25-month trend of steady declines throughout the recession. Credit card borrowing peaked at $976.8 billion in October 2008. That’s good news for Visa, but the days of rapid growth are over, our spending habits have changed forever since 2008. The consensus for the 3% growth in December was seasonal spending and nothing more. Visa Inc. has much to prove to investors, can it beat its competitors, will its lobbying efforts be successful to fend off the 12 cent cap threat, and will the analysts 19% average ROI come true?

Tough questions when deciding if there is value left in Visa (V) shares, perhaps Kim Kardashian can provide some comfort:

“I know people think we drive around in these nice cars and we do whatever we want and our parents will pay our credit cards, but that’s not the case.”

Credit card use has inched up, but it a bold statement to say the “charge it” mentality has returned in America. Besides, if the Kardashians aren’t going to pay for their children’s credit card bills, how can shareholders hold out hope the glory days will return for Visa?

The battle for payment method in the 21st century is with mobile devices, iPhone and Andriod phones will one day replace our credit cards (or so how the thinking goes) and the winners will be eBay’s Paypal (EBAY), Google (GOOG) or Apple Inc. (AAPL). PayPal revenues are expected in the range of $6 billion to $7 billion in 2013, driven by consumer preferences, market expansion, and innovation in the areas of mobile, digital, social and local.

Bottom line: Its not up to wallet friendly CEO Joseph Saunders to return Visa (V) to greatness, the consumer will ultimately decide the fate of credit card companies and our government will be right there with them setting the rules.

Frank A. Lara Jr

The author holds no positions in any of the securities mentioned in this publication.

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