- On the operational side of things, Visa clearly outperforms MasterCard in terms of operating margin, net margin and free cash flow yield.
- However, MasterCard has a more robust balance sheet (with less intangible assets) and is expected to grow faster than Visa.
- I currently have no position in Visa but would be interested in an initial position around the $200 level.
As I like the business model of credit card companies but had no idea if I should prefer Visa (V) or MasterCard (MA), I will compare both companies in this article, based on operational metrics, the situation of the balance sheet and the outlook for 2014 and beyond. Based on the comparisons in the different sub-paragraphs I will be able to form a conclusion at the end of this article.
The financial results
In this paragraph, I will compare the financial results of Visa and MasterCard. I think it's fair to compare the companies based on their full-year results instead of the last completed quarter. As such, I will compare the FY 2013 results from Visa with the FY 2013 results from MasterCard.
Let's start with the operating margin of both companies. MasterCard recorded operating income of $4.503B on total revenue of $8.346B, whilst Visa reported an operating income of $7.239B on total revenue of $11.778. This means that Visa actually wins this first round as it has a much higher operating margin than MasterCard.
I'm moving over to the net margin now to see if the difference between the net margins between both companies is smaller than the operating margin. And Visa wins again here as its net profit of $4.98B results in a net margin of 42.3% which is substantially higher than MasterCard's 37.3%.
The third and last point I'd like to discuss is the free cash flow ratio. The free cash flow is based on the operating cash flow minus the investment cash flow. For Visa's operating cash flow, I decided not to take the litigation expenses into account, as in the longer run these costs will not be recurring. This results in an operating cash flow of $7.4B and an investing cash outflow of close to $0.5B for a total free cash flow of $6.9B. I also decided not to take the sale and purchase of investment securities into account, so I just focused on capital expenditures. MasterCard reported an operating cash flow of $4.135B and spent just $300M in capex so its net free cash flow is approximately $3.835B.
This means that at the current market capitalizations, Visa has a free cash flow yield of 4.93%, and MasterCard 4.18%. So Visa actually wins on all three accounts, as you can see in the following table which summarizes my findings.
Free Cash Flow Yield
The Balance Sheets
To compare both balance sheets with each other, I will use the latest available filings, which means I will compare MasterCard's year-end balance sheet with the balance sheet of Visa at the end of its first quarter of FY2014.
At the end of the most recent financial quarter, Visa was trading at approximately 5.2 times its book value, which isn't exactly cheap. However, MasterCard's valuation is even worse as the company is currently trading at 12.25 times its most recent book value. And once again, Visa is a clear winner. However, if I deduct intangibles and goodwill from the equity, MasterCard wins, as its intangibles total just $1.8B, while Visa's goodwill and intangible assets have a total value of approximately $23B. Taking this into account, MasterCard is trading at 16.2 times the tangible book value, while Visa is trading at approximately 35 times the tangible net assets.
Moving over to the current ratio of both companies, both companies have healthy ratios with MasterCard once again outperforming Visa with a ratio of 1.81 versus 1.77 (keep in mind a ratio higher than one means the company has sufficient current assets to cover its current liabilities). Granted, the difference is small, but MasterCard scores some valuable points here.
Let's summarize the results again in a table.
Price/Tangible Book Value
In this paragraph I will compare the outlooks of both companies based on the average analyst expectations. I will look at the EBITDA growth over the next three years and the trend in operating margins. I will immediately summarize my findings in a table.
EBITDA Increase 2014 vs 2013
EBITDA Increase 2015 vs 2014
EBITDA Increase 2016 vs 2015
Operating Margin 2015
So MasterCard will show a faster increase of EBITDA compared to Visa, which is relatively important. However, its operating margin will still be approximately 10% lower than Visa's operating margin in 2015.
Based on all metrics I analyzed in this article, I think Visa is a better buy than MasterCard at this point, despite MasterCard showing a higher EBITDA growth over the next few years and despite the fact that Visa has a lot of intangible assets on its balance sheet. As Visa will continue to expand its business, I expect the free cash flow (excluding investments other than capex) to be $10B by 2016.
Does this mean I'll run out and buy Visa right now? No, I prefer to wait for a dip. There seems to be a technical support around the $200 level, and I would prefer to wait and pick Visa up around $200/share. Investors could also write put options while they are waiting. I'd particularly be looking at writing a P200 September 2014 for $8.70 which results in an annualized yield of almost 7%.
Additional disclosure: I currently have no position but might be tempted to write a put option at the right price.