Charge Ahead With MasterCard

11/06/2007 12:00 am EST

Focus: STOCKS

Ken Kam

CEO, Marketocracy, Inc.

Ken Kam, editor of Marketocracy Marketscope, says some of his best investors like the giant credit card company’s prospects.

Your next best investment could be with the credit card you have in your wallet.

MasterCard (NYSE: MA) has seen its stock more than triple since going public in May 2006 at $46. And many investors seem convinced it’s headed higher.

This is, after all, a company whose card is accepted worldwide—yet it is not even the most common credit card in many countries. Every time someone charges a purchase on MasterCard, MA gets a little slice of the purchase. The other credit card companies—e.g., CapitalOne, American Express and Discover—aren’t similar enough for a true comparison, since—unlike MA—they actually incur credit risk from holding customer balances on their books. The only true comparable is Visa, which is not yet publicly traded.

After a rough July and August, MasterCard has been on a tear, up about 25% off its recent lows. (It closed Monday below $186, 6% below its all-time high—Editor.) For MA to be a good investment now, the company has to grow more than is currently expected. What could be the source of this unexpected growth?

MA is more than just a credit card company. Debit cards are where a lot of their growth will be and the debit business is not well understood in the US.

Credit cards started in the US and became the dominant payment product in the US in Europe and many other parts of the world; cash was valued more than credit so credit cards were not as readily accepted.

Debit cards have had a difficult time establishing themselves because to Americans it doesn’t make sense to pay the same price (or more with a fee) with a debit card as it does with a credit card (especially with all the rewards). Europe is a very different market.

Debit cards are preferred by the merchants in Europe because they receive payment immediately—it’s like cash. Debit is where the action and growth is in Europe and elsewhere and it is beginning to get traction in the US, too.

With the single currency euro of the EU, there is an effort to harmonize a single debit system and will require banks to clear through just one system by 2010. MasterCard’s Maestro payment-processing system has superior technology to Visa, and there doesn’t appear to be a viable alternative. MasterCard could win this bid.

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