Visa and Mastercards

Why's Mastercard's stock doing so well when a lot of people can't pay their credit card debt?

2007 set the record for the number of credit card debt defaults, and the problem is likely get worse in the near future. Is Mastercard currently overvalued? If an investor has Mastercard stock now, is this a good time to get out?

Public Comments

1. MasterCard doesn't lend the money; banks do. MasterCard gets its revenue from transaction fees.
2. Bloomberg just reported that bankrupcy filings were up 40% last year: "Personal bankruptcy filings in the U.S. rose almost 40 percent during 2007 as consumers struggled to manage rising credit card debt and the home mortgage loan crisis drove many to seek court protection from creditors. Individual filings climbed to 801,840 compared with 573,203 in 2006, according to the National Bankruptcy Research Center. The increase "presages even higher filings this year, as the heavy consumer debt load is made worse by the home mortgage crisis," Samuel Gerdano, executive director of the American Bankruptcy Institute, an industry group that distributed the report, said Thursday in a statement. Bankruptcy filings declined in the final months of 2005 and early 2006 after consumers with credit problems rushed to file ahead of changes in U.S. bankruptcy law that took effect in October 2005. The reforms made it harder for people to erase debt. Banks, credit card companies and retailers had lobbied for the changes. Short-term borrowings on credit cards likely drove the rise in individual bankruptcy filings last year, said F.G. Ghadar, director of the Center for Global Business Studies at Pennsylvania State University. "Credit card borrowings are quite substantial," Ghadar said, adding that any rise in the unemployment rate may prompt an even larger surge in bankruptcies. The number of U.S. residents filing first-time claims for unemployment benefits fell last week, a government report showed. Initial jobless claims decreased to 336,000 in the week that ended Dec. 29 from a two-year high of 357,000 the prior week, the Labor Department said." http://www.app.com/apps/pbcs.dll/article?AID=/20080104/BUSINESS/801040451/1003/rss08 As far as Master Card stock, the PE is 33 and it has already had a good run, although being a troubled sector, I would sell shares, and see potential downside risk in the low 130's for the stock.
3. Mastercards business model is free of any risk of defaults. The risk is passed to the banks, all they do is collect transaction fees on a vast scale. Because everything is done by computers, their cost per transaction is close to none. This business model is so awesome, I can't find words to express my admiration. As far as the future, it's very bright for MC. The world is moving away from cash. Even if credit cards go out of favor, the company still gets fees from ATM cards with MC logo. Imagine if the entire world starts using plastic and reaches the spending levels of US. Even a small percentage of countless trillions worth of transactions is a lot of money for what basically is nothing more than computer time.