Back in August, I published an article on Visa (V) and MasterCard (MA), asserting that the card processors would benefit from an uptrend in consumer spending. At the time the article was written, consumer spending had just rebounded from its first decline in ten months (spending rose .5% in July after falling .2% in June). Indeed, I turned out to be right, as strong consumer spending helped fuel a 38% jump in profits for MasterCard during the company's third quarter. Consumer spending, which accounts for nearly three quarters of U.S. economic activity, has risen each month since I wrote the first article, climbing .2% in August, .6% in September, .1% in October, and .1% in November.
While October and November's numbers were a bit light, spending from November 21 through December 25 (the holiday season) rose 4.1% from the same period in 2010 according to Gallup. The Wall Street Journal notes that strong holiday sales "are expected to help Visa and MasterCard post improved quarterly earnings" next month. Perhaps the most positive development for card processors is the 10% expansion of consumer credit in November. Outstanding balances rose $20.37 billion in November, with $5.6 billion of that total coming from credit cards, according to Fox Business. Although Visa and MasterCard do not loan money to consumers, they nonetheless benefit when banks extend more credit, as they derive revenue from the processing of card transactions.
Obviously, the more credit cards banks give out, the more transactions Visa and MasterCard will eventually process. The fact that in November, consumer credit expanded at the quickest pace in more than a decade should bode well for the amount of transactions processed by Visa and MasterCard during the most recent quarter. Some analysts speculate that the extension of more consumer credit may mean that consumers are increasingly turning to credit cards to pay bills. If this hypothesis is true, it is all the better for Visa and MasterCard as their profits will rise with any increase in card use. Revolving credit also rose in September and October, signaling a sustained uptrend in credit card usage.
In short, the card processors will reap the rewards of consumer credit expansion in the form of more transaction fees and higher payments volume, but will not have to shoulder much of the burden should consumers not be able to pay back the money they borrow. In choosing between the two companies, it is important to remember that Visa is the dominant player in the debit card arena, although new rules governing debit card transaction fees may give MasterCard "an opportunity to steal market share." Debit cards are rapidly replacing checks and cash as the preferred form of payment, which means Visa has plenty of room to grow revenues by capitalizing on its leadership position it the debit card market.
The company is also expanding its presence internationally, as its consumer debit payments volume grew by 34% outside the U.S. in 2011. Additionally, Visa's total processed transactions grew by 12% in 2011 and 14% in 2010, all according to the company's most recent annual report. By comparison, Mastercard's total processed transactions grew by only 2.9% from 2009 to 2010 according to its 10K (the company has not released its 10K for 2011 yet so this year's numbers are not yet available). Visa's fourth quarter earnings (released in October) were positive, as the company met analysts' earnings expectations and reported revenue that was 13% higher than last year's fourth quarter.
Additionally, the company processed 9% more total transactions than it did in the fourth quarter of 2010 and saw a 14% rise in payments volume. MasterCard's numbers looked a bit more impressive than Visa's in its most recent quarterly report, but Visa's dominance in the debit card market make it a more attractive play on a global shift away from cash and towards plastic for day-to-day purchases. Although I prefer Visa, either company is an excellent play on rising consumer spending, expanding consumer credit, and the increased use of debit cards and mobile payments. Both stocks performed exceptionally well in 2011, with Visa rising nearly 40% and MasterCard climbing 50%. I would look to buy before the companies report earnings in February.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in V, MA over the next 72 hours.
