Visa (V) and MasterCard (MA) reported earnings for the September quarter on Wednesday, Oct. 31. The growing popularity and adoption of cashless transactions in the U.S. and internationally led to double-digit year-over-year revenue growth for both card giants. Visa reported a 15% increase in revenues over the prior year, whereas MasterCard achieved a 10% currency adjusted revenue growth. Following the results posted by the two companies, we have revised our models.
Our price estimate of $538 for MasterCard’s stock implies a premium of 20% to the current market price, driven primarily by high short-term growth in processed transactions, whereas our $151 price estimate for Visa is about 5% ahead of the current market price. Visa’s processed transactions continue to grow at a high single-digit rate that has been observed historically, and we believe that the markets have accounted for this growth quite accurately.
Visa’s Debit Share in the U.S. Slipping Following Dodd-Frank
Debit cards are the most commonly used cashless payment system in the U.S., accounting for more than two-thirds of all cashless transactions in the country. The company has been losing share in the debit card market since the Durbin amendment to the Dodd-Frank bill came into effect. The bill requires banks with more than $10 billion in assets to use separate payment processing networks for signature authorized and PIN authorized debit card transactions.
Visa, which dominated the market with over two-thirds of all cashless transactions last year, has been adversely affected by this ruling as it siphons away market share to its competitors. Debit transactions processed by Visa’s network fell by 6% during the last quarter. In contrast, MasterCard reported a 14% increase in debit gross dollar volumes, which fueled a 24% increase in processed transactions. Management attributed the majority of this growth to increased PIN debit transactions. We expect the effects of the Durbin amendment to lead to a short-term spike in the number of MasterCard’s transactions processed.
We have changed our forecast for the number of transactions processed by MasterCard, with short-term growth in the low teens through the next two years. Long-term growth will be driven by improving global economic conditions and the company’s expansion in emerging markets; we expect MasterCard to maintain the high single-digit growth rate that has been observed historically. Growth in transactions will not only drive transaction fee revenue, but will also have a positive impact on revenues earned through assessment fees that are calculated as a percentage of gross dollar volume of transactions. We do not expect operating margins to be influenced by the expansion, as most of the company’s expenditure is on client rebates.
Despite the fall in debit numbers, Visa still maintains a healthy share of more than 50% in the cashless transactions market, which includes credit, debit, and pre-paid cards. The effect of the debit decline was mitigated by a 9% increase in credit card payment volume, leading to a 14% year-over-year increase in data processing revenues. The effect of the Durbin amendment will likely wear off in coming years as the market adapts to the new policy; already the decline in debit transaction volumes is less than the 9% observed in the June quarter.
We expect Visa’s established network of issuing banks, which includes over 15,000 financial institutions, and its reputation worldwide to drive steady growth in processed transactions in the next few years. Our forecast for the number of transactions processed by Visa has been adjusted to reflect the high growth rate (approaching 10%) that Visa has been able to maintain through the last few years and in 2012.
Growth Outside the U.S.
Visa has reiterated its goal of generating 50% of its revenue from outside the U.S. To this end, it achieved growth of 12% in payment volume outside the U.S. in the quarter. Cross-border volume grew by 10%, which is a little less than the 14% growth rate reported in the second quarter. The decline in growth rate was due to a slowdown in Southeast Asia and Latin America. International transaction revenues, which are greatly influenced by currency exchange rates, increased by 5% to $796 million. We expect Visa to maintain a healthy growth rate in international transactions and have adjusted our forecast to account for this.
MasterCard is also focused on achieving international growth. The company reported a worldwide increase of 14% in gross dollar volume. Outside the U.S., the growth rate was 17%, with more than 20% growth in Asia-Pacific, Middle East, and Africa. Cross-border volume increased by 14%.
MasterCard recently launched a U.S. dollar-denominated MasterCard card in China, in partnership with Citibank (C). We believe that growing economies in Asia like India and China will drive growth in MasterCard’s international transaction GDV, leading to a subsequent increase in international transaction revenues. For more details, see our article "MasterCard Is Ready To Break New Barriers In China, But How Successful Will It Be?"
Disclosure: No positions.