Mastercard and Visa Profit on Stronger Consumer Spending

The two plastic powerhouses, Visa (V) and Mastercard (MA), reported quarterly results this week. Let's take a look at the reports and then talk about what they mean.

Both beat expected earnings. Mastercard beat 3.16/share vs a consensus of 3.05 and Visa beat 1.23 vs 1.21. Year over year, revenue was up for both as well. Mastercard was up 11% and Visa up 18%. Earnings also were up for both, Mastercard up +41% and Visa up +21% y/y.

So far so good, nice revenue and earnings growth out of each. Mastercard had the better earnings growth, Visa the better revenue.

Let's look at some other information and statistics

Both were able to push through price increases, but operating margins had a bit of a variance. Mastercard's were about 40%, and Visa's about 60%. Note though that Mastercard had some special considerations, such as the acquisition of Datacash. Its margins probably should expand according to a few analysts I read. It expects 50% gowing forward.

Both are showing plenty of international strength. Cross border volumes rose for each, Mastercard up 19% and Visa up 16% y/y. Cross border purchases are especially attractive because they collect higher fees.

Visa bought back 15 million shares and raised their dividend this quarter. It's also of note that Mastercard purchased Travelex so they can catch up to Visa on the fast growing prepaid credit card market.

The big overhang on both of these stocks has been the Durbin Amendment. Both companies are now saying they believe they can delay implementation at the least and likely curtail the effects. They also are both indicating, in typically coded language, that they believe they can get around portions of the law. Never underestimate a corporation's ability to find loopholes, right?

However, it's not impossible the DA could be done away with or curtailed by the lawmakers themselves (Please read my other article for details). In an encouraging sign, Congress will now be having hearings about the amendment in mid February.

What does this all mean then? Analysts sure seemed to like the quarter. S&P has both at 4 stars with a target of $267 for Mastercard and $82 for Visa. Credit Suisse's (CS) analysts, which I frequently read through TD Ameritrade, are more bullish, giving Mastercard $275 and Visa $110 price targets.

I believe both companies are showing strength even in the face of the regulatory uncertainty. Both have good earnings and revenue growth. Both have excellent international sales exposure, which seems to be ever growing in popularity, and both benefit from a continuing replacement of paper cash with plastic. The world economy is expanding again, and the perpetually active US consumer is back buying at pre-recession levels.

I think both are good investments, and which you like better mostly depends on what you think will be the outcome of the congressional regulation. Visa has much more debit card exposure, so it will be hurt more by implementation of the DA. This is somewhat priced into the stock already, so it would benefit from the DA's curtailment. I personally think the DA is going to take it on the chin, so I am going with Visa. While Mastercard is smaller, and thus could grow faster, I like Visa's international and prepaid exposure more.

Overall I would say that either one is worth serious considering for your investment porfolio at these prices.

Disclosure: I am long V. I have no position in Mastercard.