Street Speculator

The market dropped significantly, especially the financial sector. The DOW (DJIA) dropped by 283 points. The NASDAQ dropped by 45 points. The news that caused such drop was the latest report in the drop in home sales.

Ignore that news and look into these two companies. Our analysis is based on the business models of VISA (Symbol: V) and MASTERCARD (Symbol: MA). Although both are usually affiliated with the “credit card” industry, neither company are exposed to the same risks as other companies in the financial sector.

Unlike Discover, Capital One, and American Express, neither VISA nor Mastercard “lend” money. They are networking companies. What they do is allow electronic transactions to flow through their networks from 1 location to another. One illustration of what these networks do is when money travels from a bank (Through swiping a credit or debit card) to a merchant during a sales transaction. VISA and MASTERCARD charge fees to the merchants based on the transaction value (or price of the purchase) and they charge a fee to banks for the rights to use their logo on the branded cards (Logo on Check Cards, Gift Cards for Merchants, Credit Cards, etc…)

EX. You, Consumer A, purchase a TV from Wal-Mart using your Bank of America (BAC) Check Card. The purchase price is $400. Visa (or Mastercard) may charge Wal-Mart 2% of each transaction where a purchase was made with a card containing their logo, which subsequently have to travel through their networks. In this case the fee charged is $8, charged to Wal-Mart.

Online purchases are also included. The fees charged to the merchants by VISA (V) and MASTERCARD (MA) is determined by the type of transaction, DEBIT or CREDIT. From our understanding, the fees charged for debit transactions may be a bit higher than those where the consumer pays as a credit purchase.

I would classify both companies as CASH COW’s with little or no inherent risk, except sharks, I mean lawyers. They definitely look to be great investments for the long-term. Look at some of their fundamentals:

as of 7.24.08

VISA (V)

Price: $70.08   52wk high: $89.84  Cash: $5.64 billion  Debt: $112 million

Was the largest IPO (Initial Public Offering) in history, raising $17.9 billion

MASTERCARD (MA)

Price: $259.08  52wk high: $320.30  Cash: $2.66 billion  Debt: $229 million

IMP: Both companies report quarterly earnings on July 31, 2008. They are highly volatile where there is heavy trading activity daily on the stock exchanges. Do not be surprised if both stock prices raise $10 or more in on the 31st if they report better than expected earnings.