Yes, I realize the world will never truly go “cashless.” Many shoppers appreciate the anonymity of paying with cash, and cash in some physical form probably always will be with us. Still, the percentage of transactions settled with “plastic” or through other electronic means grows every year, and the continued growth of internet commerce will only speed this along.
By some estimate, as much as 40% of transactions in the United States still take place with cash or paper checks, and the percentage is significantly higher in most emerging markets. Suffice it to say, MasterCard and Visa will have healthy demand for their credit and debit cards for the foreseeable future, regardless of what happens to the economy. If retail sales were to experience zero growth in the years ahead, MasterCard and Visa would be able to enjoy at least modest gains purely from consumers switching to plastic from cash or checks.
MasterCard and Visa also are well positioned to profit from the rise of the new emerging-market middle class. Visa gets close to half of its revenues from outside the United States, and MasterCard gets more than half. Much of this is from the fast-growing economies of Asia, Latin America and the Middle East. Expect to see these percentages rise in the years ahead. While the U.S. and Europe remain mired in a cycle of debt deflation, emerging markets continue to grow, and millions of people formerly trapped in poverty join the ranks of middle class consumers every year.
Neither MasterCard nor Visa are “cheap” in strict value-investor terms; the companies trade at 17 and 16 times their respective 2012 earnings estimates. Still, this slight premium is worth paying for two high-quality, high-growth companies supported by long-term trends.
Visa is a current recommendation of The Sizemore Investment Letter, and Sizemore Capital clients have a position in the stock at time of writing.