Stocks For An Economic Recovery: Financials

Searching for the largest beneficiaries of a potential economic recovery in the financial sector, it is very difficult to determine who will gain first. Many expect large commercial banks to perform well during the recovery; I am against this thought. I would argue that the U.S. banking system will go through a much longer period of re-structuring and re-capitalization which will take at least the next decade to fully sort out. Looking at the current environment, it is best to invest in areas with the least amount of regulation and sustainable fee revenue generation. Keeping this in mind, the best play is Visa, Inc. (V).

Both Visa and MasterCard (MA) have performed relatively well this year (each up over 10% YTD), as investors have rewarded their no-credit exposure business models. Rather than profiting from both the credit card loan portfolios and transaction fees from consumers using their transaction networks like Discover Financial Services (DFS) or American Express (AXP), Visa and MasterCard mainly profit from consumers using their networks and hold no credit exposure.

Throughout the onset and expansion of this economic downturn, Visa has continued to invest in new products and IT initiatives. This has sustained revenue growth for the period and will drive it moving forward. For 2009, many analysts are estimating that Visa will increase its revenues in the range of 7.5-8%. In comparison, most estimates for MasterCard are flat to negative revenue growth rate.

One reason for the large difference in revenue growth between Visa and MasterCard is their relative currency exposure. Compared to MasterCard, Visa has limited exposure to the Euro because Visa and Visa Europe operate as separately owned entities. MasterCard, on the other hand, has significant exposure to the Euro, which may affect its bottom line this year.

Visa also has a larger market share of debit cards than MasterCard. In 2008, Visa had roughly 75% of the U.S. debit card volume. Debit card exposure is a direct play on non-discretionary items like food products, gas, and household products. Typically consumers rein in spending on their credit cards when they feel a pinch in their wallets. Bigger ticket items fueled the credit card transaction growth over the past 5 years, but spending has fallen dramatically during this recession.

When making a bet on the economic recovery, it is important to note that the consumer will guide the economy once confidence is restored in the system. Higher confidence results in increased spending. Increased spending will result in higher card volumes, which will lead to higher profits in the form of fees for Visa.

It is extremely important to watch a few economic indicators and reports when timing your investment in Visa. Consumer spending will have a direct affect on the fees Visa generates. To track consumer spending, follow the U.S. Retail Sales figures as well as the U.S. Personal Consumption Expenditures. International air-line traffic is also an important statistic to watch, as Visa receives high margins for cross-border transactions.

Visa has proven itself to be a solid company that is able to increase its revenues through fees on both debit and credit card transaction growth. Even with a pro-longed recovery, Visa will benefit from its debit card exposure and consumers switching to electronic forms of payments.

The rest of this free research report “Stocks For An Economic Recovery” which includes commentary on all sectors is available for download at the following link.

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