Card giant not offering much of a bargain

Visa Inc's shares look cheap only by comparison with those of MasterCard Inc, its biggest rival among credit-card networks.

The proposed range of $37 to $42 a share, disclosed in a filing on Monday, would make Visa less costly relative to last year's revenue, according to Bloomberg calculations. The price-earnings ratio would also be lower, even after adjusting for a $2.65 billion pre-tax reserve that Visa established to cover an antitrust settlement with American Express Co in November.

Change the benchmark to financial companies in the Standard & Poor's 500 Index, including several of the biggest issuers of Visa's cards, and the initial public offering by the New York-based company looks like much less of a bargain.

Out of 92 companies in the S&P 500 Financials Index, the stock may be among the 10 most expensive based on sales and the top 15 based on profit. The exact ranking is dependent on Visa's IPO price. And many of these stocks are real estate investment trusts, whose cash flow matters more than either gauge.

Visa, which wants to raise as much as $17 billion by going public, may fetch this kind of premium price. For one thing, the company is growing at a relatively fast pace as consumers become more affluent worldwide.

Revenue rose 33 percent for the fiscal year ended Sept 30 on a pro-forma basis, assuming the IPO and a related redemption of shares owned by member banks had been completed. MasterCard, based in Purchase, New York, had a 22 percent increase in 2007.

For another, Visa is largely insulated from credit-market turmoil because the company processes transactions, rather than extending loans to cardholders. Companies in the latter business have suffered as more consumers fall behind on debt payments.

Visa's IPO price range amounts to 5.2 to 5.9 times pro-forma sales for the 12 months ended Dec 31, according to data from the latest version of its prospectus, filed on Monday. The ratio falls short of MasterCard's 6.6 times. Yet it's well above the 1.7 for American Express, which pays for the purchases made through its card network, the third-largest.

The sheer size of Visa's share sale may explain the gap between the company's ratios and MasterCard's. Even at the $37 minimum price, it would be more than six times larger than the MasterCard IPO, completed in May 2006.

Visa's costliness by comparison with American Express is another matter. It's a signal of many investors' reluctance to own financial stocks, a trend that may hurt demand for the IPO.

David Wilson is a Bloomberg News columnist. The opinions expressed are his own.

(China Daily 02/27/2008 page16)