Back during my teen years, I would read every book I could get my hands on about Buffett and Graham. And of course if you know anything about Buffett’s buying history, then you know the story of why he chose to gobble up as much Coca-Cola stock as he could. To most people at the time, the market for Coke seemed completely saturated. Everyone in America was drinking it! However Buffett saw beyond that… aside from its brand, “moat” and solid fundamentals, Buffett realized there were still untapped growth opportunities internationally.

Today, I can’t help but notice some of the striking similarities when it comes to Visa (V) and MasterCard (MA). Just like Coca-Cola, they are cash cows with solid fundamentals and have a high barrier to entry (their moat is deep). But most impressive is their limited saturation in the emerging markets, which are just now undergoing the transition from cash to credit cards.

As of February 22, 2011:

Visa MasterCard Marketcap: 52.57B

Trailing P/E: 17.03

Forward P/E: 13.12

PEG (5 yr expected): 0.83

Profit margin: 37% Market Cap: 32.38B

Trailing P/E: 17.61

Forward P/E: 12.67

PEG (5 yr expected): 0.75

Profit margin: 33.33%

Lately both of these stocks have been battered. First from the recession (which happened not long after their IPOs) and then from all the talk about the credit and debit card reforms. How much will those fee crackdowns hurt these companies? Well that is yet to be determined, but it is clear that Wall Street has already priced their stocks as if the absolute worst, doomsday fee reform scenario were going to happen.

Right now only around 40% of Visa’s revenue comes from overseas, yet that is where 60% of the growth from last quarter came from. By the looks of this chart below, it’s easy to understand why…

On the other hand more than half of MasterCard’s revenue comes from overseas, but their international growth closely mimics Visa.

Lower risk than banks?

We all know what happened to the banking industry during the recession, but Visa and MasterCard were relatively unscathed. Why? Because all they do is process payments… they don’t actually issue cards or extend credit. Taking a cut from each transaction but not enduring the risk associated with extending credit… doesn’t sound like a bad deal, does it?

Conclusion?

Although American Express and Discover are commonly accepted cards in the United States, when it comes to most developing countries, Visa and MasterCard practically have monopolies. So not only do they enjoy an international stronghold with a strong barrier to entry, but they are also riding two powerful trends (1) the switch from paper currency to debit/credit cards, and (2) massive growth opportunities in developing markets.

Taking all these points into consideration, I strongly believe these are two credit card companies that are worth researching for your portfolio.

About the Author: Michael is the owner of CreditCardForum.com where he blogs about the best credit card deals he can find. In addition to working full-time in the credit card industry, he also owns a small amount of Visa and MasterCard stock himself.