MasterCard and Visa are getting hurt by a number of issues beyond their control. U.S. consumer spending is improving, but not quickly and not by a lot. Global foreign exchange rates have been a headwind all year. And then there’s the macroeconomic picture, which includes the eurozone flirting with recession, in part because of tension with Russia.
At the same time, the development of digital payments systems like Apple’s (AAPL) Apple Pay have made investors more cautious on the prospects for MasterCard and Visa stock — even though the payments processors are partnering with Apple to make it happen.
MasterCard stock in particular is suffering from its own success. The market is accustomed to MasterCard putting up year after year of red-hot growth, but now that’s starting to moderate. The market is likewise concerned about Visa’s growth potential.
Even beat-raise quarters from MasterCard and Visa aren’t going to pull these stocks into the green very soon — they’re down too far. That said, better-than-expected earnings could create a foundation from which they could start to reverse their losing trends.
Visa reports earnings on Oct. 29 and Wall Street forecasts just okay growth. On average, analysts polled by Thomson Reuters expect earnings per share to increase to $2.10 from $1.85 a year ago. Revenue is projected to rise 7.3% to $3.19 billion.
Piper Jaffray is very bullish on Visa stock. Indeed, analysts at the investment bank and asset manager call Visa stock their top payments sector pick ahead of quarterly earnings. From a note to clients:
“We believe Visa’s FY 4Q14 results will show slightly better momentum driven by 1) a strengthening U.S. consumer backdrop and 2) our expectation for stable cross-border volume growth. Those two factors are the key drivers behind our revenue growth acceleration forecast for Visa, which will lap easier y/y cross-border volume growth comps starting in CY 2015. Surely, global FX and macro headwinds are growing concerns.”
Another thing Visa has going for it is that it has been generous to shareholders while its shares underperform. Visa recently hiked its quarterly dividend by 20% to 48 cents a share. Additionally, Visa is in the midst of a $5 billion share repurchase program, which it launched a year ago.
MasterCard reports quarterly earnings on Oct. 30 and the growth outlook is a bit brighter than Visa’s. The Street is looking for earnings to increase to 78 cents a share from 73 cents a year ago. Revenue is projected to grow 10% to $2.45 billion.
Items outside of the narrow top- and bottom-line numbers are going to get attention, too, notably a $1.6 billion claim against MasterCard by U.K. retailers in an antitrust suit. From analysts at Zacks Equity Research:
“The final verdict on reducing interchange fees in European Union (EU) earlier this month, followed by a fresh tussle with retailers in the U.K., who now demand reduction in domestic interbank rates will likely weigh on MasterCard’s financials significantly.”
In other worries, tough regulatory changes in Russia are forecast to take a bite of $50 million out of the top line in fiscal 2015, Zacks says. Additionally, the eventual migration of JP Morgan Chase’s (JPM) consumer credit portfolio to Visa will hurt MasterCard’s gross dollar and cross-border volumes.
On the brighter side, MasterCard is gaining traction in mobile payments. Like Visa, it has partnered with Apple on Apple Pay.
At 21 times forward earnings, neither MasterCard or Visa stock looks expensive given their growth forecasts. Anything they can do to assure the Street that they still have robust growth trajectories will go a long way toward getting them out of the red.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.