Does Visa's Beat Bode Well for MasterCard?

We don't own Visa (V), but we do have Mastercard (MA), which reports Thursday. I'll repeat every quarter: People do not realize the international opportunities these two companies have. Visa was very solid tonight

• Visa Inc.'s profit rose a better-than-expected 41 percent in the most recent quarter, as more money changed hands using its credit and debit cards -- particularly outside the United States.
• Visa earned $422 million, or 51 cents a share, for the April-to-June period. That is up from $299 million in the same period a year ago, before the company went public.
• The results, reported Wednesday after the market closed, included litigation and restructuring costs. Excluding those costs and other items, earnings per share amounted to 59 cents. Analysts had anticipated 48 cents per share, according to Thomson Financial.
• Operating revenue rose to $1.61 billion, above the average analyst forecast, from $1.37 billion a year ago. The driver was a 19 percent jump in payments volume, or the amount of money spent using a Visa-branded product, to $652 billion.
• Visa's payments volume -- one of the company's key performance measures, along with transactions -- rose 19% to $652 billion in the quarter. Total volume rose 22% from a year earlier to $1 trillion.
• The number of total payment transactions on Visa cards rose 15% to 10.7 billion.
• The company now has 1.6 billion cards carrying the Visa brand, it says.
• The April-to-June quarter, Visa's first full quarter as a public company, saw defaults and delinquencies surge in a growing swath of consumer debt. But Visa, like MasterCard, processes card payments for banks and other institutions, and takes a cut from the purchases made on the cards. The banks are the ones that lend the money to cardholders, and take the losses when they default (important to note this economically, not important for Visa or Mastercard specifically).
• "Despite a challenging economic environment in the United States and a softening in traditional credit card spending, the strength of Visa's debit business drove solid growth in the region," Visa's CEO Joe Saunders said in a statement.
• He pointed to strong expansion in the Asia Pacific region, Latin America, Canada, Central and Eastern Europe and the Middle East.
• The United States accounts for about 63 percent of Visa's total payments volume. U.S. payments volume rose nearly 12 percent to $388 billion, while payments volume outside the United States rose more than 31 percent to $264 billion.
• "Greater use of cards leads to increased transaction fees, and zero extended credit shields Visa from any default risk," wrote Celent analyst Red Gillen in a note. "Whether consumers pay off their credit cards or not, Visa's skyrocketing growth is not affected." (Bingo was his Name-O)
• Some analysts have noted that banks' decision to pare back credit lines to consumers could lead to lower spending volumes for card processors like Visa (always a risk).
• It raised its outlook for adjusted operating margins for 2008 to the mid-40 percent range, up from the low-40 percent range. And Chief Financial Officer Byron Pollitt said during the analyst conference call (see earnings call transcript) that the company is considering a share repurchase program as early as 2009.

I'm not sure why people are paying nearly 25% more in valuation for Visa over Mastercard, but we've had Mastercard and we'll continue to keep it, although the businesses are of course very similar. Similar growth, for cheaper valuation, always is something I like. I was hoping for some kind of miss from Mastercard so we could cheap up shares cheaper but it appears this won't be happening.

Disclosure: Long Mastercard in fund; no personal position

Comments

[InvestBaboo:]

No, no luck if you are hoping for a miss from MA so that you can buy more shares. On the contrary you have to wonder if Visa can do this well just how well will MA do????? I predict a super beat.

2008 Jul 31 01:49 AM

[mrbill for V:]

Trader Mark we pay a 25% premium for Visa because it is 4 times the company at least. Also you should never hope a company misses it's numbers so that you can buy shares cheaper, that's like saying i hope my team loses so they will lower ticket prices next year.

2008 Jul 31 07:15 AM

[taperx:]

Oops, prognostic, i guess its time to buy, Mastercard took a loss!!

2008 Jul 31 10:43 AM

[Ryoga:]

to my understanding V doesn't contain the EU segment (still owned by banks in the EU), yet the CEO quotes intl numbers?

the difference between these two stocks is V is bigger, but MA has more global exposure.

help me out here, is V's CEO talking about US customers using cards overseas?

2008 Jul 31 11:20 AM

[Adesai:]

Trader Mark,

hey whats up???? I remember your articles on IPI.

Anyways, there are a number of reasons why V is trading at a higher PE ratio than MA.

1. Size, size, size- due to global market share: V-60-66% while MA 25-30%. This makes a huge difference when competing for banks in emerging countries such as china and india.
2. Veurope- Veurope has not joined V inc., and Veurope represents about 15-20% of market share. Veurope shares will be bought by Vinc in the near future. Currently your seeing Visa without Veurope's earnings
3. Huge banks/ institutional investment. If you look at banks in china, india, brazil, middle-east they have invested alot of money in V shares, which means they will likely be caring there card.

4. Legal suits. While you just saw what happened to MA shares today b/c of Amex suit, Visa has already settled before they went IPO. Additionally V has set aside 3 billion of IPO money for Discover cards pending law suit while MA has not..... MA will likely see the same tumble is shares prices/net quarterly loss when they settle with discover.

5. Planned by-back of shares. V will likely buy back shares in 1st quarter of 2009, which will effectively lower outstanding shares, increase EPS and effectively decrease PE ratio.


These are the reasons i am aware of.

I guess you got what you wanted....you wanted MA to miss to drop in share prices. Well here you are, but be careful what you wish for.

2008 Jul 31 02:29 PM

[TraderMark:]

Thanks Adesai

I am fine with the drop - hoping for $220s and if the market continues to erode might get $200 or better. Still 2 franchies in near monopoly and the global growth story is in inning 1. Many on the globe have never seen a credit card.

Thanks for your points, I understand where you are coming from but I am not sure if that list deserves a 20% type fo premium. But the market says so, and the market is right in the near term :)

2008 Jul 31 05:42 PM

[JJC:]

My Comments are being made on 8/1/08 everything I read is why I own both V & MA. I dont understand why MA has dropped almost 40 points over the past two days. I cant believe that the AMEX litgation is the only cause.

2008 Aug 01 11:23 AM

[User 172125:]

NO

2008 Aug 01 02:58 PM