by Dan Burrows | December 23, 2013 11:36 am
MasterCard (MA) and Visa (V) are capping off a great year with a solid holiday selling season. Indeed, both MA stock and V stock are clobbering the broader market this year. But with consumer spending forecast to grow only moderately next year, are MasterCard stock and Visa stock still buys in 2014?
MA stock and V stock have been terrific holdings since the stock market bottom of 2009, although MA stock definitely has the edge. MA stock is up 463% since 2009, while V stock gained 302%. By comparison, the S&P 500 is up 109% over the same time frame.
MasterCard and Visa are the largest payments processing companies in the world, and they’re benefitting handsomely from the ongoing transition to electronic payments from cash and checks. However, while it may not be too obvious from MA stock and V stock price performance, both MasterCard and Visa are sensitive to consumer spending in the both the U.S. and abroad.
Then, of course, there’s the ever-present threat of hackers. The recent attack on Target (TGT) — where 40 million accounts were compromised — might not hurt MasterCard or Visa directly, but it sure doesn’t build confidence in electronic payments. That’s not good for MA stock or V stock in the longer run.
Regardless, after an outstanding 2013, MA stock and V stock look set for more outperformance next year. But if you had to pick just one, would MasterCard or Visa be the better bet? Here’s a quick look at MasterCard stock and Visa stock to help decide:
Share Price: $817
YTD Performance: +67%
Market Cap: $98.35
MasterCard (MA) lately has been delivering a steady stream of good news to anyone holding MA stock. MasterCard recently raised its dividend 83% to $1.10 a share and announced a new program to buy back up to another $3.5 billion in MasterCard stock.
In a move even more likely to boost MA stock in the short term, MasterCard will split its shares by 10-1 in January. That will bring the face price of MasterCard stock down to about $82 from $817, which should help draw interest from individual investors put off by the sky-high nominal price.
In addition to the financial engineering and stock split, MA stock has some fundamental tailwinds too. MasterCard profit is forecast to jump 18% next year to $31.11 a share from $26.39 (not accounting for the upcoming stock split). That strong earnings growth should be driven by a 12% gain in revenue, driven by higher cross-border volumes, better pricing and further growth in processed transactions. Indeed, for the first nine months of this year, MasterCard saw a 13% rise in processed transactions.
However, MasterCard stock isn’t exactly a bargain. The forward price-to-earnings multiple (P/E) of 26 can be justified by expectations that MasterCard will grow earnings by about 20% a year for the next five years or more, but that doesn’t make MA stock look cheap. Neither does the fact that MA stock currently trades at about a 50% premium to its own five-year average by forward P/E.
Share Price: $217
YTD Performance: 43%
Market Cap: $138.41 billion
Visa (V) is trailing MasterCard stock by a wide margin this year — and over the last five years, too — but that by no means makes it a dud. MA stock may be crushing V stock, but Visa stock is still absolutely crushing the market. Unless you’re blinded by greed, you have to be happy with the returns out of V stock.
However, it is true that as well as V stock has done, it hasn’t kept pace with MasterCard stock, even though profits have the same long-term growth trajectory.
Visa, the largest credit card company by both market cap and reach, didn’t do V stock any favors when it lowered its full-year earnings guidance. That was due in large part to a stronger dollar causing negative foreign currency effects. Yes, Visa handles 60 billion transactions a year in more than 200 countries, but that global sprawl also leaves it more exposed to currency fluctuations — not to mention worldwide economic sluggishness.
More optimistically — and strategically — Visa stock is especially well-positioned for the rapid rise of mobile payments. Visa is working with Samsung (SSNLF) and other partners to ensure that it becomes the market-share leader in mobile just like it is in traditional payment processing. The mobile payments revolution could be a game-changer longer-term for V stock.
Visa stock is also attractive in the shorter term. The new $1.5 billion program to buy back V stock will offset some of the dilution weighing on this year’s earnings-per-share, for one thing.
Visa stock is also more attractively priced than MasterCard stock, sporting a forward P/E of 21 despite having essentially the same expected trajectory for earnings growth.
Most likely, investors will be happy with either MA stock or V stock in 2014. Consumer spending might not be on fire, but it continues to pick up. International spending, especially in Europe, could accelerate next year, too.
That should help MasterCard stock and Visa stock continue their winning ways. But if you had to pick one, do you go with massively outperforming MA stock or blue-chip V stock, a component of the Dow Jones Industrial Average?
As it has for years now, MA stock looks to have the edge. Shares aren’t cheap, but they aren’t particularly overpriced either. Sentiment is especially bullish on MasterCard stock as a top pick among credit card companies, and the dividend hike and share repurchase program will help boost total returns, too.
Then there’s the stock split. Shares of a company almost always get a lift from a stock split, even though nothing fundamental has changed. But in this case, the lift could last a while for MA stock. For better or worse, plenty of individual investors would probably love to chase those hot returns in MasterCard stock — but can’t swing the $800-plus share price.
MA stock has more momentum than V stock, and the stock split should only add to it. For that reason and more, MasterCard stock is a buy over Visa stock for 2014.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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