Visa (V), MasterCard (MA) Shares Hit on Fed Proposal; Some Analysts Say Buy the Dip

Shares of credit card processors MasterCard (NYSE: MA) and Visa (NYSE: V) came under pressure on Thursday after the Federal Reserve discussed proposed rules governing debit card interchange fees and routing.

Analysts weighed in on the situation, with some suggesting to buy the dip.

Deutsche Bank has maintained a Buy rating on both companies, saying that the sell-off is overdone.

Deutsche Bank analyst says, "Although the market had a right to be disappointed with the first draft of the rules, we think the sell-off in the network stocks was overly harsh. And while ongoing uncertainty could cause further near-term volatility, we think the risk/reward looks compelling at these levels, particularly so for V as we think the market is underestimating future growth potential and overestimating any adverse reaction from new debit rules."

Goldman Sachs removed Visa from its Conviction Buy List, citing regulatory overhang. The firm retains a Buy rating on the stock and $93 price target.

Goldman Sachs analyst says, "While we think that the market sell-off on MA and V shares is overdone, we acknowledge that the near-term uncertainty on signature exclusivity keeps the wall of worry on these stocks in place until the final rules are made available in April 2011."

Goldman said the bigger issue is the lack of clarity on the Fed's final view regarding exclusivity.

Duncan Williams maintains a Strong Buy rating on MasterCard and Visa, with price targets of $300 and $100 respectively.

Duncan Williams analyst says, "We think Visa and MasterCard will likely face some pressure on their debit processing fees from issuers, which could result in a relatively modest reduction in debit related revenues, but we do not think this reduction will be significant over the coming years considering the secular growth drivers in play at both companies and the ability of both companies to maintain their revenue yields following interchange reductions in other countries. However, even if we are wrong, we still see good value in V and MA at current levels."

Janney Capital Markets reiterated its Buy rating on both companies.

Janney analyst says, "Based on our conversations with Visa, US debit card revenue totals 20% of total revenues, 2/3rds of which are signature-based. MasterCard has publicly stated 15% of their total revenues are US debit. Interchange fees impacts banks, not the networks, but we understand concerns about banks seeking price concessions from Visa and MasterCard. To this end, we have sensitized our current estimates and on this basis, still find the shares of both networks attractive."

Wedbush maintained its Neutral rating on both stocks, while lowering its price target for Visa from $270 to $238 and MasterCard from $87 to $72. The firm has also suspended its FY12 estimates for Visa, previously $5.79.

Wedbush analyst says, "We believe that the dramatic change to the current market-based pricing for issuers is unlikely to leave MasterCard/Visa with the same type of pricing to issuers and acquirers. We believe a pricing structure that supported ~$2 billion from U.S. debit for Visa and MasterCard as issuers garnered $16 billion of interchange fees is unlikely to hold up when issuers can only generate $4 billion of fees, or perhaps less."

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