Member Q&A: Visa and MasterCard
Q) What is your opinion on Visa (V, $79.55, -0.45) and MasterCard (MA, $230.80, -3.92) ? Both have had nice runs.
A) We’ve always liked Visa over fellow credit card processing company MasterCard for several reasons. It has a much larger presence in the debit card market than its rival, which helps insulate it a bit more from a weak economy, as people often make more nondiscretionary purchases using debit cards. In fact, more than 50% of its U.S. business is debit card transactions. It’s also a larger company with more scale and a lot of cash, and it has a litigation reserve built up that MasterCard does not have. Visa also isn’t as exposed to the weaker European market.
Visa reported very impressive fiscal Q4 results for the period ended September 30th. The company saw its adjusted profit rise 23% to $552 million, or 74 cents per share, from $448 million, or 58 cents per share, a year ago. That was ahead of the 72-cent analyst consensus. Revenue rose 10% from $1.88 billion to $1.71 billion. Payments volume was down -2%, while total transactions climbed 9%. The total number of cards carrying the Visa logo rose 5% to 1.7 billion.
Visa’s operating expenses dropped by more than half to $1.01 billion from $2.15 billion a year ago, largely the result of reduced litigation spending following the settlement of several major lawsuits. The company also spent -12% less on marketing and advertising.
For fiscal 2010, Visa guided for revenue growth of 11-15%, implying revenue of $7.67-$7.95 billion. EPS was projected to rise more than 20%, implying earnings of at least $3.72 per share. Analysts were looking for EPS of $3.44 per share on revenue of $7.51 billion.
The smaller MasterCard reported Q3 earnings of $452 million, or $3.45 a share, for the three months ended September 30th, versus a loss of -$193.5 million, or -$1.49 a share, a year ago. The current quarter’s results included a $6.2 million litigation settlement charge, while last year’s results included an $827.5 million pre-tax litigation charge. Revenue rose 2% to $1.4 billion. Analysts were looking for EPS of $2.94 on revenue of $1.35 billion.
Worldwide purchase volume was up 0.4% on a local currency basis, while gross dollar volume was up 0.3% on a local currency basis. Transactions processed rose 8%.
Operating expenses fell -13%, while advertising and marketing expenses dropped -29%.
BMR Take: Both Visa and MasterCard are riding a strong global secular trend of more and more people choosing to pay for purchases with plastic instead of cash. While this phenomenon is well entrenched in the U.S., it is still at the early stages of growth in many emerging nations.
We have long liked Visa, but have been cautious to add it to our Recommended List in the past largely due to valuation. We think the stock is solid, and would put a target range around $90-$93 on the stock. Thus, we’d prefer to buy on a dip.
While we haven’t liked MasterCard as much in the past, it looks more attractively priced than its biggest rival after its post-earnings selloff. Part of the dip could be because management said that marketing expenses and rebates would both rise sharply in Q4. Since we think MasterCard should trade at a discount to Visa, we would put a target range of around $270-$280 on the stock.
All in all, while we think both stocks have some upside, we would prefer to be buyers of Visa on a dip, just because we think there might be a shift more towards debit cards in the U.S., and Visa has a much stronger presence in this area.
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