Stock Value Finder

 So far on this blog most of my posts have been about the payment card industry, so with all the noise about the VISA IPO I wanted to post about my initial thoughts. I have briefly reviewed the prospectus, but not had a chance to take an indepth look yet. I plan on doing that over the next few weeks. If anyone is interested the S-4 is located here.

Background

VISA and MasterCard (NYSE:MA) are card processing networks, they do not actually issue credit/debit cards to consumers. VISA and MasterCard were founded by banks to provide common processing networks for the bank issued credit/debit cards. At the time of creation they were jointly owned by the member banks. In the last few years American Express (NYSE:AXP) and Discover (NYSE:DFS) sued VISA and MasterCard over their duopoly status claiming unfair business practices. To reduce liability the member banks decided to spinoff MasterCard and VISA into separate publicly traded entities.

MasterCard had it’s IPO in May of 2006 starting at $39 a share. MasterCard has beat expectations for growth for the last year and it’s stock has risen to around $160/share. This has provided quite a return for investors, and many are hoping and expecting VISA to do the same.

Thoughts

At the time of the MasterCard IPO the market was not in full bull mode as it is now. Also right before the MasterCard IPO was the Vonage IPO which opened at $17/share and fell quickly. The underwriting bank were a little spooked by the failure of the Vonage IPO and lowered the initial price of the MasterCard IPO.

While I believe MasterCard’s share were undervalued at the IPO I also believe that the board of directors determined the amount of money they would need for court settlements and judged the size of the IPO based on that factor.

Based on the market share figures for card usage (MA ~30%, VISA ~60%) according to the S-4 VISA feels that they should be valued at a premium to MasterCard. In reading the determination for the VISA IPO price it appears the underwriters used DCF, and comparisons to other card industry stocks. Because of this I believe there will be much less of an opportunity for an undervalued IPO by VISA. In the end VISA will end up with a very large war chest which could benefit shareholders once the litigation is settled with larger dividends or share buybacks. In the near term it would seem that VISA will come out of the gates fairly valued.

I am a large fan of the card processing industry, it’s a cash flow rich industry with strong growth prospects worldwide. I hope to detail VISA in later blog posts. I would appreciate any reader opinions now that we’ve had a few days to review the S-4.

Disclaimer: I own a position in both MasterCard and Discover Card Services 

This entry was posted on Friday, June 29th, 2007 at 4:42 am and is filed under investing, finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.