Stock Smackdown: Visa vs. MasterCard

by Dan Burrows | August 1, 2012 11:24 am

Visa (NYSE:V[1]) and MasterCard (NYSE:MA[2]), respectively the world’s No. 1 and No. 2 payments networks, have both been winning stocks for the year, for the last 52 weeks and, sheesh, ever since they both went public a few years back.

But as good a bet as MasterCard has been, Visa has been even better. Meanwhile, MasterCard’s latest quarterly results gave Wall Street pause, while Visa blew past analysts’ bottom- and top-line estimates.

So which credit card company is the better stock going forward? Lets’ have a look at some key considerations:

MasterCard

MasterCard fell sharply Wednesday after second-quarter revenue missed Wall Street’s forecast. Like so many companies that have substantial international exposure, MasterCard was hurt by Europe, where recession and sluggish growth is battering consumer spending.

As has been a recurrent theme this season, the stronger dollar hurt revenue when MasterCard exchanged weaker foreign currency for more expensive greenbacks[3].

The company did post a 15% profit gain that exceeded Street estimates, helped by more transactions and greater payments volume. But the 9.2% revenue increase still came up short.

MasterCard is up a whopping 850% since it went public in 2006. For comparison, Visa has gained 130% over the same period, while the S&P 500 is up 10%. Heck, MasterCard has been on such a tear, it looks like Apple (NASDAQ:AAPL[4]), which is up about 870% since the payments processor made its stock market debut.

MasterCard is also up an impressive 46% over the last 52 weeks, beating the broader market’s 10% gain, but lagging Visa’s 55% jump. The gap is even wider for the year-to-date. MasterCard is beating the S&P 500 by 7 percentage points in 2012, but trailing Visa by 10 points.

If there’s a bright spot to that relative underperformance, MasterCard shares are less expensive than Visa’s, at least on a forward earnings basis. MasterCard currently sports a forward price-to-earnings ratio (P/E) of 16.8 vs. Visa’s P/E of 18.

Visa

Unlike MasterCard, Visa easily shrugged off any effects from global sluggishness and a stronger dollar in the second quarter. Solid growth in payments volume, cross-border transactions and processed transactions outside the U.S. led the company to blow past Street forecasts.

On an adjusted, basis, earnings rose 24% to $1.56 a share, or 11 cents better than analysts’ average forecast. Revenue jumped 10% to exceed Street estimates by $600 million, helped by a 6.3% gain in worldwide spending on Visa payment cards even after adjusted for currency exchange.

It was a strong quarter, marred by very little. But market share could become a concern.

Visa is still far and away the world’s largest payments processor. It commanded nearly 65% of global purchase transactions on credit and debit cards last year, vs. MasterCard’s share of 25.6%.

But Visa did lose more than a point of share, mostly to its main competitor.

Shares in Visa are up a whopping 27% for the year-to-date, and that has left shares looking more expensive than MasterCard — and about 50% more pricey than the S&P 500. Furthermore, MasterCard looks to be the higher quality stock, at least by return on equity. MasterCard has an ROE of 35%, whereas Visa stands at just 5%.

Verdict

Both stocks have been big winners, and Visa looks to be weathering the challenging global consumer environment a bit better than MasterCard. But Visa is also significantly more expensive than MasterCard, and its low ROE undermines the valuation case over the longer term.

If you’re already positioned in either of these stocks, there’s probably little to be gained by switching horses in mid-stream, especially since both stocks have produced remarkable outperformance.

But if you’re thinking of initiating a position, MasterCard, despite the recent hiccup, offers a better bargain and higher quality, especially after Wednesday’s pullback. That bodes well for more patient investors.

As of this writing, Dan Burrows held none of the securities mentioned here.

Endnotes:
  1. V: http://studio-5.financialcontent.com/investplace/quote?Symbol=V
  2. MA: http://studio-5.financialcontent.com/investplace/quote?Symbol=MA
  3. more expensive greenbacks: http://investorplace.com/2012/07/strong-dollar-is-slicing-corporate-sales/
  4. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL

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