I recently came across a stat from April in the Globe and Mail that caught my attention. Specifically, UBS (NYSE:UBS) listed the ten most overweighted and underweighted stocks in the MSCI AC World Index. The number one overweighted stock was Visa (NYSE:V) with Mastercard (NYSE:MA) also making the list in the sixth spot. Being on this list certainly isn’t bad news for Visa stock.
Why is the UBS list important?
Merrill Lynch research shows that stocks overweighted by portfolio managers underperform stocks underweighted by those same managers over the long haul.
The fact that both Visa stock and Mastercard made the top ten overweighted stocks should at least have shareholders of the respective companies revisiting why they own the stocks.
Currently, both stocks are trading at 17 times sales. Is either of them worth owning? Why don’t we have a look?
The Big Reason to Own Visa Stock
Visa CEO Al Kelly recently spoke to Barron’s about the opportunities that exist for the $353 billion financial services company.
Naturally, Visa continues to benefit from the secular trend to electronic payments away from cash and checks. Of course, so too does Mastercard.
However, it is business-to-business payments that’s got Kelly excited.
“We’re already the biggest player in the world in (B2B),” Kelly told Barron’s contributor Tae Kim. “Yet I think there is enormous upside. If I use the baseball analogy, we’re probably no more than in the second inning as it relates to the B2B opportunity around the world.”
A new product for Visa in the B2B space that’s sure to drive revenue growth is B2B Connect, the company’s cross-border supplier payments platform to simplify international B2B transactions.
While Visa Direct helps small- and medium-sized businesses process payments across borders, B2B Connect will allow large businesses to process big-ticket transactions efficiently and securely on a global basis.
“Visa B2B Connect is a distributed ledger based, non-card platform. Its unique distributed-ledger based architecture enables significantly shorter transaction times, from weeks to one-to-two days,” The Financial reported in mid-May.
Using blockchain architecture, Visa is ready to offer global banks a new alternative for processing high-value transactions.
“B2B Connect’s digital identity greatly reduces the opportunity for fraud that might otherwise exist with checks, ACH and wire transfers today, while also helping companies remain compliant as part of the regulated financial ecosystem,” Kevin Phalen, global head of Visa Business Solutions at Visa, stated last October while discussing B2B Connect’s product details.
Seven months later, it’s close to launching B2B Connect, providing investors with another reason to like Visa stock.
The Big Reason to Own Mastercard
Bigger isn’t necessarily better.
While Mastercard’s market cap is 28% less than Visa and its operating margins are slightly lower — 56% compared to 60% — the fact that’s it smaller makes it nimbler than its bigger rival allowing it to move more quickly when it spots an opportunity.
“It’s smaller in size than its rival Visa but its relative size makes it more nimble, winning the new Apple Card business for example. The global market for electronic payments will continue to grow and MasterCard will continue to grow with it, particularly internationally where a majority of the growth is expected to be generated,” Marketocracy founder Ken Kam wrote in May as part of an interview with analyst John Archer.
Archer, whose Tabernacle Fund’s largest holding is Mastercard at 14% of the portfolio, believes the stock’s current intrinsic value is $230. However, Archer isn’t selling because only 10% of the $22 trillion global market for payments is card-based, providing Mastercard with a long runway for growth.
Mastercard might be smaller than Visa, but that doesn’t make it equally attractive over the long haul.
The Verdict
Although I’ve written more about Visa in this article, there’s little difference between the two stocks.
The only metric besides having higher operating margins that might tilt the decision in Visa’s favor is its debt-to-equity ratio of 0.6, about half that of Mastercard.
As the largest (Visa) and second-largest payment processors in the world, if you don’t mind paying 17 times sales, they’re both excellent long-term holds.
At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
