Credit cards are a big business. A large number of consumers use a credit card for a wide range of transactions from a daily coffee to home renovations. With so many card users and so many transactions, it’s easy to see how credit card companies have market caps in the billions of dollars. We’ll look at just how big they’ve gotten and what the prospects are for that growth to continue.
There are four credit card issuers that can argue that their main business is issuing cards, clearing transactions, and making money off of it. These are Visa (V), MasterCard (MA), American Express (AXP) and Discover Financial Services (DSF). We can consider these as the pure plays from an investment standpoint.
Visa, with a market cap of $105 billion, has the advantage of size, but that could mean growth will be slow in comparison to smaller rivals. On the other hand, Visa is a solid choice to weather most financial contractions when consumers use their credit cards less to save money – or worse – default on their payments. (For more, see: Which Is the Better Lender – VISA Or A Bank?)
The same applies, more or less, to MasterCard ($84.4 billion) and American Express ($93.7 billion). These are established companies with enough assets under management to handle a lot of financial hardship before they show stress. Smaller Discover Financial Services ($28.8 billion) by way of contrast has a lot of room to run compared to the other three as measured by its price-to-earnings ratio. Investors generally expect companies in similar businesses to have P/E ratios in line with each other. DFS has the lowest P/E of the group at 12.75 compared to American Express at 16.66 and Visa and MasterCard at over twenty times earnings. If DFS can continue its strong growth, the stock's price may outpace earnings to push the P/E up towards the mid-teens.
Of course, there are also the diversified financial companies, including the big banks that also issue consumer credit cards. Citigroup Inc. (C), for example, has a market cap of $158.6 Billion and a bank’s P/E of 17.2. With all of these diversified issuers, however, you are not buying just a credit card company, but a bank with a whole new set of rewards and unexpected risks (see: The 2007-08 Financial Crisis in Review).