Visa Inc.
PLEASE NOTE: This is our last Hotline for 2010. Our next Hotline will go out on Friday, January 7, 2011. VISA INC., $66.90, New York symbol V, fell 16% this week. That’s because the Federal Reserve proposed new limits on fees banks can charge for debit-card transactions. Companies that process these transactions, such as Visa and MasterCard Inc. (New York symbol MA), charge banks a percentage of the transaction’s cost. Right now, the average debit-card fee is 1.14%, or $0.44 per transaction. The Federal Reserve, acting under new legislation to regulate financial companies following the 2008 credit crisis, proposes to cap these fees at $0.12 per transaction. The proposals could also make it easier for new competitors to process transactions....
Visa has been around since the 1960s, but only recently became a publicly traded company. eBay started up in 1995. Because of its unique business model, the company was able to avoid the implosion of the dot-com bubble in the early 2000s. We feel both companies offer an attractive way for investors to add to their Finance-sector holdings without exposing themselves to the mortgage-related problems that continue to depress bank stocks. Visa is suitable for all investors. eBay is more risky. VISA INC. $76 (New York symbol V; Conservative Growth Portfolio, Finance sector; Shares outstanding: 836.9 million; Market cap: $63.6 billion; Price-to-sales ratio: 7.9; Dividend yield: 0.8%; TSINetwork Rating: Above Average; www.visa.com) operates the world’s largest retail electronic-payments network. The company processes credit, debit, prepaid and commercial payments under the Visa, Visa Electron, Interlink and PLUS brands. Visa’s credit cards are accepted around the world, and Visa/PLUS is one of the largest global automated-teller machine networks, offering cash access in more than 200 countries....
CANADIAN IMPERIAL BANK OF COMMERCE, $74.75, Toronto symbol CM, is buying the Canadian MasterCard credit-card business of U.S.-based Citigroup Inc. (New York symbol C). Right now, CIBC only issues Visa cards, so this purchase will diversify its credit-card business. The bank did not reveal the purchase price. However, the Canadian MasterCard business has $2.1 billion of outstanding credit-card loans. As of April 30, 2010, CIBC had $12.4 billion of credit-card loans outstanding. The bank expects to complete this purchase by October 31, 2010. It should add to CIBC’s earnings in the first year....
APPLE INC., $235.97, Nasdaq symbol AAPL, rose 2% this week on media reports that the company will soon launch a new version of its hugely popular iPhone. Aside from being thinner than the current iPhone, the new model will likely have more memory and a number of new features. Apple may also be developing an iPhone that runs on code division multiple access (CDMA) cellphone networks. Right now, the iPhone uses global system for mobile communications (GSM) technology. More cellphone providers use GSM than CDMA. However, some large U.S. carriers, including Verizon (see below) and T-Mobile, use CDMA networks. A CDMA iPhone would let Apple expand its market share by making the iPhone available to these carriers....
Fortress Paper Ltd., $16.55, symbol FTP on Toronto (Shares outstanding: 10.2 million; Market cap: $169.4 million), is an international specialty paper producer. The company gets 62% of its revenue by making non-woven wallpaper-base products, as well as graphic papers and other specialty papers. It makes these products at its Dresden mill in Germany. The remaining 38% of its revenue comes from security paper used in banknotes, passports and visa statements. Fortress makes security paper at its Landqart mill in Switzerland. Non-woven wallpaper base contains a certain proportion of synthetic fibres. These fibres give the wallpaper base a number of unique characteristics. One of the most important is easy removal, because the base is easily stripped off when it is dry....
HOME CAPITAL GROUP INC. $25 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 34.4 million; Market cap: $860 million; Price-to-sales ratio: 1.9; SI Rating: Average) is the parent company of Home Trust Company, a federally regulated firm that specializes in residential first mortgages and credit cards for borrowers who don’t meet the criteria of traditional lenders. The credit crisis and Home Capital’s reliance on less-creditworthy customers caused the stock to drop from $41 last May to $14 in November. However, Home Capital is safer than it appears. Its stringent screening process eliminates most of the problem borrowers. Still, 0.86% of Home Capital’s loans were in default in 2008. This is up from 0.72% the previous year. Despite the volatile economy, Home Capital’s 2008 earnings rose 20.4%, to $108.7 million, or $3.13 a share. It earned $90.2 million, or $2.59 a share, in 2007. Revenue rose 23.3% in 2008, to $454.7 million from $368.9 million in 2007....
We continue to recommend that all investors own at least two of Canada’s big-five banks. But these should not be the extent of your financial holdings. Other types of financial investments, such as high-quality insurance companies, should play a role in your portfolio, as well. Here are four non-bank financial companies we like. All offer an attractive combination of growth and value. However, only three are buys right now. GREAT-WEST LIFECO INC. $16 (Toronto symbol GWO; Conservative Growth Portfolio, Finance sector; Shares outstanding: 943.9 million; Market cap: $15.1 billion; Price-to-sales ratio: 0.6; SI Rating: Above Average) is Canada’s largest insurance company. Great-West administers $339 billion worth of assets. The company also offers wealth-management services. It operates in Canada (55% of its earnings), Europe (35%) and the U.S. (10%). Power Corp. (Toronto symbol POW) owns 72.7% of Great-West’s shares....
MasterCard Inc., $126.79, symbol MA on New York (Shares outstanding: 129.2 million; Market cap: $16.4 billion), operates the world’s second-largest electronic-payment network (only Visa’s is larger). MasterCard first sold shares to the public at $39, and began trading on New York in May 2006. MasterCard markets a portfolio of brands and products that, aside from MasterCard credit cards, includes Maestro debit cards, the Cirrus automated teller machine (ATM) network and MasterCard PayPass debit cards. MasterCard is accepted at over 28 million retail locations. However, the company does not issue credit cards itself. MasterCard’s customers, which consist of banks and other financial institutions, issue the cards and manage the accounts of cardholders and merchants. The financial institutions, not MasterCard, assume the credit risk....
HOME CAPITAL GROUP INC. $17 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 34.5 million; Market cap; $586.5 million; SI Rating: Extra risk) is the parent company of Home Trust Company, a federally regulated trust company that specializes in residential first mortgages to small business owners, the self-employed and others who don’t meet the stricter criteria of larger, traditional lenders. Home Capital recently began offering traditional mortgages. While that puts it in direct competition with the big banks, Home Capital feels this move will strengthen its position among mortgage brokers. Demand for new residential and commercial mortgages rose 39.8% to $1.1 billion in the third quarter of 2008. Consequently, earnings grew 24.6%, to $0.81 a share (total $27.9 million) from $0.65 a share ($22.8 million) a year earlier. Revenue improved 24.0%, to $117.0 million from $94.3 million. Strong gains at the Visa credit card and personal loan businesses also help fuel earnings and revenue....
Home Capital Group has dropped sharply in the past few months, largely due to the worldwide credit crisis. However, the company continues to profit from the niche markets it operates in. Its recent expansion into more traditional lending also broadens its customer base. As well, Home Capital has no exposure to the housing problems in the United States. HOME CAPITAL GROUP INC. $17 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 34.5 million; Market cap; $586.5 million; SI Rating: Extra risk) is the parent company of Home Trust Company, a federally regulated trust company that specializes in residential first mortgages to small business owners, the self-employed and others who don’t meet the stricter criteria of larger, traditional lenders. Home Capital recently began offering traditional mortgages. While that puts it in direct competition with the big banks, Home Capital feels this move will strengthen its position among mortgage brokers....