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Both Visa Inc. (V) and MasterCard Incorporated (MA) had received positive upgrades from analysts recently. In this article, both companies will be analyzed fundamentally and technically. Options strategies will also be reviewed for investors.

Visa Inc.

Visa Inc. is a global payments technology company that connects consumers, businesses, banks and governments in more than 200 countries, enabling them to use digital currency instead of check and cash. Visa operates processing networks, VisaNet, and an open-loop payment networks. The company charges its clients different fees based on the dollar volume and the number of transactions. V was up 1.26% and closed at $159.43 on February 22, 2013. V had been trading in the range of $111.94-$162.77 in the past 52 weeks. V has a low beta of 0.76.

On February 22, 2013, V was upgraded by Guggenheim to Buy. On February 21, 2013, UBS upgraded V from Sell to Neutral and increased its price target from $123 to $156 after admitting their negative call on the stock was "simply wrong." As said by the analyst, John T. Williams,

"We are upgrading V to Neutral following 1QFY13 earnings and its guidance reiteration. While shares have underperformed YTD (+6.2% vs. the S&P 500 +9.0%), we believe intact long-term guidance, operating leverage, the dividend, capital allocation options (i.e. buybacks), and no exposure to Europe will provide a floor-despite slower global spending growth trends."

Analysts have an overall Buy rating with an average price target of $150.04 for Visa. V's current price of $159.43 is 5.9% above analysts' average price target.

There are a few positive factors for V:

  • Higher revenue growth (3 year average) of 14.7 (vs. the industry average of 5.5)
  • Higher net margin of 22.5% (vs. the average of 21.2%)
  • V has zero total debt and has a total cash of $2.78B.
  • V generates an operating cash flow of $899M with a levered free cash flow of $6.99B
  • V offers an annual dividend yield of 0.83%

Technically, the MACD (12, 26, 9) is showing a bearish trend but could turn positive anytime soon as the MACD difference continued to converge. The momentum indicator, RSI (14), is picking up and indicating a bullish lean at 56.65. V is currently trading above its 50-day MA of $155.46 and 200-day MA of $136.21. The next resistance is $162.13, the R1 pivot point, followed by $166.69, the R2 pivot point, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

Reviewing Options

For bullish investors, a credit put spread can be reviewed as below:

  • Short 1x Apr 20, 2013 put at the strike price of $150 for the credit of $1.79
  • Buy 1x Apr 20, 2013 put at the strike price of $145 for the cost of $1.12

Profit/Risk: Maximum profit of $0.67, and the maximum risk of $4.33 ($5 loss - $0.67 credit received)

Outcome: Upon options expiration, gain 15.47% return on margin if V closes above $150 or V stock will be acquired at $149.33 (6.34% lower than the current price of $159.43) if V falls below $150.00. The acquisition cost will be lower than the analysts' average price target of $150.04.

MasterCard Incorporated

MasterCard Incorporated is a global payment and technology company that connects consumers, financial institutions, merchants, Governments and businesses worldwide, enabling them to use electronic forms of payment instead of cash and checks. MasterCard operates the second-largest, open-loop card network in the world, providing various services in support of the credit, debit & related payments programs. MA was up 0.82% and closed at $523.83 on February 22, 2013. MA had been trading in the range of $389.90-$535.35 in the past 52 weeks. MA has a beta of 0.91.

UBS upgraded MA from Sell to Neutral and raised its price target from $425 to $519. UBS also commented,

"We are upgrading MA to Neutral. Shares have modestly underperformed YTD (+4.4% vs. the S&P 500 +9.0%) and we believe intact long-term guidance, operating leverage, a modest dividend, and capital allocation options (i.e., buybacks) will provide a floor-despite slower global spending growth trends."

Analysts have an overall Buy rating for MA with an average price target of $498.25. MA's current price of $523.83 is 4.9% above analysts' average price target.

There are a few positive factors for MA:

  • Higher revenue growth (3 year average) of 13.2 (vs. the industry average of 5.5)
  • Stronger operating margin of 53.3% and net margin of 37.3% (vs. the averages of 43.0% and 21.2%)
  • Higher ROE of 43.2 (vs. the average of 16.7)
  • MA has zero total debt and has a total cash of $5.04B
  • MA generates an operating cash flow of $2.95B with a levered free cash flow of $1.72B
  • MA offers an annual dividend yield of 0.46%

Technically, the MACD (12, 26, 9) is showing a bearish trend and the MACD difference converged in the last trading day. RSI (14) is picking up and is indicating a bullish lean at 56.25. MA is currently trading above its 50-day MA of $511.11 and 200-day MA of $458.35. The next resistance is $535.60, the R1 pivot point, and $552.80, the R2 pivot point, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

Reviewing Options

For bullish investors, a credit put spread can be reviewed as below:

  • Short Apr 20, 2013 put at the strike price of $500 for the credit of $7.35
  • Buy Apr 20, 2013 put at the strike price of $495 for the cost of $6.50

Profit/Risk: Maximum profit of $0.85, and the maximum risk of $4.15 ($5 loss - $0.85 credit received)

Outcome: Upon options expiration, gain 20.48% return on margin if MA closes above $500 or MA stock will be acquired at $499.15 (4.71% lower than the current price of $523.83) if MA falls below $500.00.

In short, both stocks are great long-term holdings with solid fundamentals, including a healthy balance sheet, stable growth, strong earnings, and consistent incomes. However, in the short-term, both stocks are currently trading above analysts' average price targets. Investors can consider establishing the long positions with the options reviewed above to gain upside credit premium or acquire the stock at a discount.

Note: All prices are quoted from the closing of February 22, 2013 and all calculations are before fees and expenses. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Source: Visa And MasterCard: Great Long-Term Stocks With Positive Upgrades