Investors are now becoming familiar with the story of Master Card MA and Visa V being pummeled by the Fed's proposal to cut interchange rate drastically for debit cards. To recap, Federal Reserve on December 16 announced the proposal to place a cap on the interchange fees banks allowed to charge merchants to 12 cents per transaction, a limit that could cut up to 90% of the current revenue of such transactions. In addition, the proposal would require merchants having the choice of unrelated networks to process transactions, i.e. networks besides VISA and MasterCard.
Banks were the primary losers in this case, but the payment network giants, VISA and MasterCard, also fell into casualties. Prior to the announcement date, they already started to drop: VISA dropped ~5%, and MasterCard dropped ~2%. On the announcement date, VISA dropped additional ~15% while MasterCard dropped ~10%. Fearing the gun is going to turn to credit card processing as well, American Express AXP also dropped ~10% since the announcement.
While the cap on interchange rate, and allowing merchants to have the choice of payment processing network can certainly hurt VISA and MasterCard, we think the market has reacted a little too much. After the drop, we have become bullish on VISA considering that:
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- VISA has strong growth in international markets, particularly in emerging markets.
- Payment options are increasingly moving towards electronic processing, including social security and other federal benefits.
- VISA has a strong balance sheet. The large drop in price has provided downside support.
- It will take time for other payment networks to catch up to challenge VISA and MasterCard, and these giants will not sit idle waiting to be slaughtered.
- Buy the stock, waiting for the stock to go up.
- Buy call options on the stock to lower capital cost and capture more upside if the stock rebounds.
- Write put options and buys the stock only if it drops further. In essence, committed to buying the stock at a lower price, or just collecting the premium if the stock trades up.
- break even at $77.28.
- lose up to $2.28 if VISA trades between $55 and $77.28
- committed to buying the stock if it drops below $55/share, and assumes the cost of $57.28/share.
- committed to any margin requirement necessary to maintain the trade.
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Posted In: Long IdeasNewsDowngradesOptionsEventsIntraday UpdateConsumer FinanceData Processing & Outsourced Servicesdebit cardFedsFinancialsInformation TechnologyInterchange ratemastercardpayment networkvisa
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