What’s in Your Wallet?

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Consumers racked up debt, but some credit card companies are in decent shape.

MasterCard

(MA, $237)

THINK OF MasterCard and rival Visa as the AT&T and Verizon of the credit card world: They provide the networks on which banks process transactions. Despite the uncertain economy, both companies are benefiting from more people choosing to pay for purchases with credit (or debit) cards rather than with cash or checks, analysts say. MasterCard grew sales, cut expenses and earned $452 million in the third quarter of2009, compared toa $194 million loss in the same period a year earlier. The Purchase, NY.-based firm, which is half the size of Visa by market value, will grow profitably over the long term, analysts say. At 18 times 2010’s expected profits, MasterCard shares are also cheaper than Visa’s.

Capital One Financial

(COF, $38)

CAPITAL ONE’S “What’s in Your Wallet?” television ads arc eyecatching, but so are its problems, in the eyes of some analysts. Unlike the credit card processors, the McLean, Va.-bascd firm issues the cards itself, so it bears the risk that cardholders will default on their payments. But a bigger problem could be a new law that makes it harder for card companies to charge fees when people exceed their credit limits. Capital One gets a comparatively large chunk of its revenue from those fees, says Chris Brcndler, managing director at Stifcl Nicolaus. Richard D. Fairbank, Capital One’s chief executive officer, recently said the company’s sales model will “remain largely intact” under the new law.

THESAN FRANCISCO-BASED FIRM runs the world’s largest electronic-payments network, processing payments in more than 170 countries. Visa’s debit card business has benefited from the declining availability of credit, which has pushed more consumers toward debit cards, says Rick Shane, an analyst at Jefferies. Worldwide, there are more than 1.7 billion cards carrying the Visa logo, up 5 percent from last year. But the number of transactions Visa processes isn’t growing as fast as it used to. And some analysts say Visa can’t push its profit margins much higher (Visa declined to comment). At 22 times 2010’s estimated profits, Visa shares are not cheap either.

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