Mastercard And Visa: A Side-By-Side Comparison

Jun. 03, 2019 9:30 AM ETMastercard Incorporated (MA), V97 Comments
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Librarian Capital
7.66K Followers

Summary

  • Mastercard and Visa are both high-quality businesses and good investments. We have already recommended Mastercard as a Buy.
  • We compare the two companies' historic volume growth, volume mix, earnings growth and valuation.
  • Mastercard is ahead in growth rates and mix. While the stock is 15-25% more expensive, we prefer it marginally over Visa.
  • At $254.19, our recommendation on Mastercard shares remains Buy.

Introduction

Both Mastercard (NYSE:MA) and Visa (NYSE:V) are high-quality businesses with strong structural growth and entrenched market positions. We have already recommended Mastercard as a Buy (see article "When Growth Beats Value"). In this article we will show a side-by-side comparison of Mastercard's and Visa's volume growth, geographic mix, earnings growth and valuation.

For readers interested in the payments industry, this article is part of a series that has also covered American Express (AXP) ("Grows At 10%+ A Year, Until It Doesn't") and PayPal (NASDAQ:PYPL) ("Much More Expensive Than You Think").

Total Volume Growth

Gross Dollar Volume ("GDV") is the total volume that flows through a card company's credit and debit cards, covering both purchase transactions and cash withdrawals. Historically, Mastercard's GDV growth has been higher than Visa’s by 2-3% annually on a global basis, but lower than Visa’s for the U.S. alone until 2018, as shown in the charts below:

Gross Dollar Volume Growth Y/Y (Global)

NB. All growth rates are y/y and in local currencies. Source: MA company filings, V company filings.

Gross Dollar Volume Growth Y/Y (U.S.-Only)

NB. All growth rates are y/y and in local currencies. Source: MA company filings, V company filings.

(Note: For Visa's CY16 and CY17 global growth rates, we have excluded the impact of the Visa Europe acquisition in Jun-16, by using CY16H1 and CY17H2 growth rates as proxy to represent the full-year growth rates.)

The large gap in the two companies' U.S. GDV growth rates in 2016 and 2017 was mostly due to the move of one co-brand partner (U.S.A.A.) by Mastercard to Visa. This was mostly in debit cards and represented lower-margin business. As we will see below, Mastercard continued to deliver strong revenue and earnings growth in those years.

On total volume growth, Mastercard is the better performer.

Geographic Mix

Mastercard has a more international volume mix, with only 30.0% of its CY18 GDV from the U.S., vs. Visa's 37.7% as shown in the charts below. This is a structural reason why Mastercard has higher growth rates - it has lower exposure to more mature U.S. market. International markets, including even many developed economies in Europe, remain significantly behind in the use of debit and credit card payments. We believe having exposure to such markets is an advantage.

On geographic mix, we prefer Mastercard for being more international.

CY18 GDV by Region – Mastercard

Source: MA results supplement (18Q4).

CY18 GDV by Region Visa

Source: V results supplement (FY19Q1).

(NB. For Mastercard, APMEA = APAC, Middle East & Africa. For Visa, LAC = LATAM & Caribbean; CEMEA = Central & Eastern Europe, Middle East & Africa.)

Volume Growth by Region

In addition to having more international exposure, Mastercard also tends to grow its volumes faster than Visa in each international market. As shown in the charts below, Mastercard's volume growth rates in Europe and Latin America in CY18 were twice or more those of Visa; it also likely grew much faster in Asia Pacific, which is part of its "APMEA" region.

CY18 GDV Growth Y/Y by Region – Mastercard

NB. All growth rates are y/y and in local currencies. Source: MA results supplement (18Q4).

CY18 GDV Growth Y/Y by Region – Visa

NB. All growth rates are y/y and in local currencies. Source: V results supplement (FY19Q1).

The faster growth rates are an indication of how Mastercard has been more successful in signing up new partners across the world. Examples of Mastercard's bank issuers in China and in Brazil, both fast-growing economies are shown below - these are among the most important financial institutions in each country.

Selected Mastercard Issuers in China

Source: MA investor day presentation (Sep-17).

Selected Mastercard Issuers in LATAM

Source: MA investor day presentation (Sep-17).

Even in the U.S. home market, Mastercard has had a number of high-profile wins with new innovative players, for example being the network for all of PayPal’s US co-brand cards, and for the upcoming Apple Card to be issued by Apple (AAPL) and Goldman Sachs (GS).

Mastercard’s growth has also been particularly strong in debit and prepaid cards, with their GDV growing 17.1% year-on-year in CY18 to reach 49% of Mastercard's total GDV. By comparison, Visa's debit card GDV (at 56% of total) grew "only" 8.1% in CY18, a growth rate that is actually slightly lower than that of Visa's credit cards (9.7%).

On volume growth by region, Mastercard is the better performer.

Earnings Growth

The key financials for Mastercard and Visa are shown in the tables below. Since 2013, Mastercard and Visa have delivered an almost identical CAGR in EPS of just under 20%. However, Visa's growth was helped by its 2016 acquisition of Visa Europe, which was an one-off opportunity.

In addition, Mastercard's growth has begun to accelerate over Visa's - in 2018, Mastercard grew EPS by more than 40%, much faster than Visa's 32.5% in the corresponding FY18 (ending September 2018). Mastercard's faster earnings growth is the product of higher revenue growth (from higher volume growth described above) and more margin expansion. We expect this trend to continue, as Mastercard has consistently grown its GDV faster, and its lower margin gives more room for operational leverage and improvements.

On earnings growth, Mastercard is the better performer.

Mastercard Key Financials (2013-18A)

Source: MA company filings.

Visa Key Financials (FY13-18A)

Source: V company filings.

Valuation

The tables below show the net income and cashflows for Mastercard and Visa. With respect to the last 12 months (ending March 2019), MA is trading on a 36.9x P/E and a 2.2% Free Cash Flow ("FCF") Yield, while Visa is on a 32.1x P/E and a 3.0% FCF Yield.

However, Mastercard's FCF has been reduced by a large cash outflow for customer and merchant incentive payments in 2018, which should reverse over time; excluding this, Mastercard's FCF Yield is 2.4%.

On these metrics, Mastercard stock is between 15-25% more expensive than Visa, likely due to investor expectations of Mastercard continuing to deliver higher growth. We believe this premium is largely justified.

On valuation, Visa is the more attractive stock.

Mastercard Net Income, Cashflows & Valuation (Last 12 Months)

Source: MA company filings.

Visa Net Income, Cashflows & Valuation (Last 12 Months)

Source: V company filings.

Historic Share Price

Mastercard and Visa shares have historically moved closely together, but with Mastercard catching up since early 2018 and outperforming in early 2019, as shown in the charts below:

Mastercard and Visa Share Price (Last 5 Years)

Source: Bloomberg Markets.

Mastercard and Visa Share Price (Last 12 Months)

Source: Bloomberg Markets.

Conclusion

Mastercard and Visa are both high-quality businesses with strong structural growth and entrenched market positions. At $254.19 and $162.76 respectively, both Mastercard and Visa shares can be good investments.

Assuming no de-rating, both stocks will deliver investor returns in the mid-to-high teens, given they expect to continue growing their EPS at double-digits (high teens in Mastercard's case). The high growth rates provide a margin of safety, ensuring a good return even the stocks were to de-rate somewhat.

We prefer Mastercard between the two, because of its consistently higher volume growth (both globally and in key markets), higher international mix, and faster earnings growth in recent years. Our recommendation on Mastercard remains Buy.

This article was written by

Librarian Capital profile picture
7.66K Followers
Global, long-term, fundamentally-oriented & concentrated investing. With more than 10 years' buy-side experience, I look at stocks globally and across industries, with a focus on the U.S. and U.K.. My investing style can best be described as "Quality Growth" or "Growth At a Reasonable Price". (previously writing under the name "Blue Sky Capital" until December 2019)

Disclosure: I am/we are long MA, AXP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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