Cashing In On Payment Companies

By Matthew McCall | June 04, 2012 AAA

Recent news regarding United States payment volume dropping 3% in April and remaining unchanged in May has weighed on the stock of companies that process such transactions. Those are the numbers out of global powerhouse Visa (NYSE:V). The crux of the weak numbers are new regulations on debit card transactions that led to a 12% decline in April and an 8% fall in May.
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The stock fell on the news, but remains within 5% of the all-time high set earlier this year. Technically, the stock is a leader in the overall market and fundamentally it remains attractive even though it is near the high. The forward P/E ratio is roughly 15.85 and the PEG ratio is 1.00. The dividend yield of 0.7% is not attracting many investors.

Once the debit card issues are flushed through the system and Europe begins to pick up again, it could be a boost to the share price of Visa and other related companies. The silver lining is that even with the negative news the stock is near a high and trades at an attractive valuation.

Competitors
eBay
(Nasdaq:EBAY) is on the list but not because of its auction website that most Americans have bought and sold items at some point in their life. It is on this list because of its PayPal division. PayPal facilitates as a payment processor that is used for transactions that occur online and on mobile devices, and is now expanding into brick and mortar. The payment revenues at eBay grew by 32% in the most recent quarter thanks to customers utilizing the services of PayPal.

The ability to pay at a brick and mortar store with a mobile app on a smart phone could be the future for the payment processing industry. PayPal recently announced it launched an app that will allow 15 million users in the United Kingdom to pay for goods at select retailers. eBay stock is also not far from a 52-week high and trades with a good valuation with a forward P/E ratio of about 14.22 and a PEG ratio of 1.28.

A smaller and not as well-known payment processing company that offers merchant services is Vantiv (NYSE:VNTV). The stock is a recent initial public offering that has done well since it began trading on the New York Stock Exchange. The company is the largest PIN debit acquirer based on the number of transactions in the U.S. The company has a forward P/E ratio of around 16.43 and a PEG ratio of 1.32, which is in line with most of its competitors.

SEE: Investment Valuation Ratios

The Bottom Line
Thinking that PayPal will become a choice for consumers to pay at a clothing store or a local coffee shop may not be far off. Considering I use my iPhone to pay for my daily latte at Starbucks (Nasdaq:SBUX) via an app, why can't PayPal and its competitors offer similar choices that will eventually be the norm for all payment processing? The big question is not will it happen, but rather who will be the leader in the new mobile payment processing. My bet is that both Visa and PayPal will be the big winners.

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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

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