Discover wants MasterCard and Visa to pay up

Posted Jun 11th 2008 9:50AM by Steven Mallas
Filed under: American Express (AXP), MasterCard Inc'A' (MA), Headline News

I love the long-term prospects of Visa (NYSE: V) and MasterCard (NYSE: MA), but I do have to concede that a pesky lawsuit by Discover (NYSE: DFS) is the one big fly in this story's soup. According to the following article, Discover wants both credit-card companies to pay $6 billion for perceived violations of antitrust regulations. Unfortunately, these damages could be tripled if Visa and MasterCard lose. One of the big problems here is that American Express (NYSE: AXP) already won a settlement of $2.1 billion from Visa late last year and the company established an escrow fund worth $3 billion for litigation payments.

I'll admit, this lawsuit does give me and my credit-card investment thesis a little case of the shivers. After all, tripling $6 billion to $18 billion means that a huge amount of money is in play here, and a successful outcome for Discover would hamper the stocks of the two big card entities. When you read through the litigation risks in Visa's SEC filings (out of MasterCard and Visa, the latter is my favorite since it is still relatively fresh off its IPO and MasterCard has already had a big run), they are pretty scary. And the fact that the $6 billion figure just came to light this week has probably soured the perception of some investors and analysts. Nevertheless, all the previous litigation talk didn't stop Visa's stock from taking off after its IPO earlier this year.

I still think both companies are worth putting on a watch list, considering the fact that their futures are extremely bright. As time goes on, debit and credit cards will be increasingly used for transactions, and both of these big brand names will capture a lot of fees related to cashless payments. Recently, I discussed growth in prepaid cards. And you've got to love the fact that credit risk is basically a non-issue with Visa and MasterCard.

I've been thinking about buying Visa lately, and I'm glad I didn't pull the trigger just yet. What I'm going to do is watch the price action over the next several days to see what guidance its trading might give me. Do I personally think the lawsuit is going to sink Visa and MasterCard? No. But if I can wait and get in at a price that more properly discounts the outcome, then I might be better off.

Disclosure: I don't own any company mentioned, but I am watching Visa for a potential buy; positions can change at any time.

Tags: American Express, AmericanExpress, antitrust, AXP, credit cards, CreditCards, debit cards, DebitCards, DFS, Discover, featured, lawsuit, MA, Mastercard, V, Visa