Visa Puts at Record High as Swipe Rule Threatens Lead: Options

Visa Puts at Record High as Swipe Rule Threatens Lead
Visa logos appear on credit and debit cards arranged for a photograph in New York. Photographer: Andrew Harrer/Bloomberg

Visa Inc. options traders are more bearish than ever, betting the company will suffer more than MasterCard Inc. from U.S. rules meant to foster competition among firms that process debit-card transactions.

Three-month puts to sell San Francisco-based Visa should the stock fall 10 percent cost 1.29 times more than calls, near the all-time high of 1.30 on Sept. 14, according to data compiled by Bloomberg. The price relationship known as skew is 1.21 for Purchase, New York-based MasterCard, down from an 11-month high of 1.31 on June 20, the data show.

Visa has rallied about half as much as MasterCard in 2011 after the Federal Reserve set rules that let retailers choose from at least two networks for debit transactions that involve the use of personal identification numbers. The Fed also capped swipe fees that merchants pay for most debit transactions, including those that require customers’ signatures. Visa processed $1.05 trillion of the payments last year, more than triple the amount at MasterCard.

“It clouds the growth trajectory for a company like Visa,” Walter “Bucky” Hellwig, who helps oversee $17 billion at BB&T Wealth Management in Birmingham, Alabama, said in a Sept. 16 telephone interview. “It experienced a high rate of growth for debit-card usage, and now maybe it’s not as high.”

Visa Revenue

Visa forecast that revenue will increase about 10 percent in 2012, according to a filing on July 6, a week after the Fed’s decision. The projection from Visa, which handled $5.6 trillion in transactions during the year ended June 30, compared with its estimate for 2011 sales to rise 11 percent to 15 percent. MasterCard predicts its sales will grow 12 percent to 14 percent a year through 2013, according to a slide show posted on the company’s website Sept. 15.

Will Valentine, a spokesman for Visa, and Jim Issokson, a spokesman for MasterCard, declined to comment.

The Chicago Board Options Exchange Volatility Index fell 20 percent last week to 30.98 for its biggest slump since the period ended July 1. The gauge of Standard & Poor’s 500 Index options prices has dropped 32 percent from a two-year high of 48 on Aug. 8, the first session after S&P lowered its rating on U.S. government debt. The gauge hasn’t closed below its 20.91 average for the past year since July 26. It rose 5.7 percent to 32.73 today.

Europe’s VStoxx Index, which measures the cost of options to protect against declines by the Euro Stoxx 50 Index, dropped 14 percent last week, the biggest retreat since July 22, to 42.96. It jumped 6.2 percent to 45.61 today.

Card Purchases

Visa said U.S. credit-card purchases rose 9.8 percent to $224 billion in the quarter ended June, compared with a 5.9 percent growth in the same period last year. U.S. credit-card spending at MasterCard rose 6.1 percent, versus 1.1 percent in the second quarter of 2010, the company said last month.

The price-earnings ratio for Visa is 19, or 12 percent less than MasterCard and close to the record 14 percent discount on Aug. 5, according to data compiled by Bloomberg. MasterCard’s valuation first surpassed Visa’s in January. Financial companies in the S&P 500 trade at 11.1 times profit.

“Economic conditions in the U.S. have slowed dramatically, and that’s likely to be true elsewhere where Visa does business,” Keith Wirtz, who oversees $16.7 billion as chief investment officer at Fifth Third Asset Management in Cincinnati, said in a Sept. 16 telephone interview. In a recession, “you’re going to see revenues diminish.”

Growth Forecasts

U.S. gross domestic product may expand by 1.6 percent this year, according to the median of 79 economist estimates in a Bloomberg survey. That’s down from a median forecast of 1.7 percent in August and below last year’s 3 percent rate.

Analysts are more optimistic about Visa than MasterCard, assigning average ratings of 4.69 and 4.53, respectively, on a 5-point scale, according to data compiled by Bloomberg. David Koning, an analyst at R.W. Baird & Co. in Milwaukee, downgraded MasterCard to “neutral” from “outperform” in a Sept. 16 note, citing the stock’s year-to-date rally. He rates Visa “outperform.”

Visa has climbed 28 percent this year to $90.03, falling 0.9 percent today after it said it agreed to a licensing deal with Google Inc. that allows its cardholders to make purchases and complete other transactions using their mobile phones. MasterCard has risen 55 percent in 2011 to $347.98.

Options traders are piling into bearish bets on Visa. The company’s December $87.50 puts had the biggest rise in open interest among all options in the past 30 days, increasing by 3,038 contracts to 3,812, according to data compiled by Bloomberg. January $72.50 puts jumped by the second-largest amount, rising by 2,976, reaching 3,782 contracts.

“This is one time when I am probably grateful for not having had the highest market share in debit in the United States,” MasterCard Chief Executive Officer Ajay Banga said last year in a conference call with analysts, referring to provisions in the Dodd-Frank Act that spurred the Fed’s debit-card rules.

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