Stacking Up Mastercard And Visa's Recent Q3 Earnings And Outlook: Mind The Gap
Summary
- Since our last report on MA, exactly a year ago where we rated the stock a “Sell”, it has significantly underperformed the S&P Index by 25% and Nasdaq by 56%.
- Mastercard's recent Q3 2021 non-GAAP EPS @ $2.37 beat consensus by 8.2% and revenue print @$5bn was 1% higher.
- Q4 outlook is better than Visa's with revenue expected to increase in the mid-20%s and non-GAAP operating expenses expected to increase in the high teens, conferring EPS increase of c.38%.
- We see valuation chasm based on NTM PE between Visa (29x) and MA (34x) as justified given MA’s premium growth profile.
- Re-valuations for Mastercard, we use an average pre-pandemic NTM PE of 28x to arrive at our 12-month price target of $360, imputing an upside of ~8% and upgrade our rating to “Neutral”. We see better value for investors elsewhere.
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Mastercard delivered a strong Q3 revenue and EPS beat
Mastercard's (NYSE:MA) Q3 non-GAAP EPS @ $2.37 beat consensus by 8.2% and revenue print @$5bn was 1% higher. The beat was mainly driven by higher than expected cross-border revenue which grew 61.3% YoY.
| Figure 1: Mastercard delivered a bigger EPS beat than Visa |
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| Source: AlphaTech Equities |
Mastercard saw continued recovery in credit volumes in Q3 2021
Mastercard saw ongoing strength in consumer and commercial credit volumes in Q3 2021 as total credit GMV grew 22% YoY vs -9% in the same quarter last year. Debit volumes remained in the positive territory most of the pandemic as it benefitted from government stimulus. Card-present volumes bounced back as most economies have reopened with card-not-present volumes (proxy for e-commerce) also seeing sustained strength.
| Figure: Credit volumes for Mastercard recuperating well after suffering in the pandemic |
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| Source: Mastercard Financials |
Cross-border; highest yielding product for both V and MA is bouncing back nicely as travel restriction ease globally.
In Q3 2021, MA reported that cross-border volume was at 97% of 2019 levels, with Europe at 112% and other cross-border volume at 83% of 2019 levels (vs Visa (NYSE:V) at 86%). Importantly, cross-border volumes averaged at or above 100% of 2019 levels in the months of August and September.
Mastercard reported that travel between Q2 and Q3 2021 had climbed from 48% of 2019 levels to 72% in Q3. And given its continued recovery, travel is tracking at 77% in the first 3 weeks of October.
| Figure 3: Cross border has bounced back in 2021, with MA expected to outperform V | Figure 4: MA's Net revenue to be higher than Visa's in 2021 and beyond |
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| Source: Mastercard and Visa Financials | Source: MA & V Financials |
Q4 Outlook much stronger than that of Visa's
MA also reported strong Q4 earnings outlook, expecting revenue to grow in the mid 20% range vs Visa's high-teens. Mastercard expects non-GAAP operating expenses to grow in the high teens (vs Visa at low-teens). This should see EPS increase by 38% for Mastercard and 20% for Visa in Q4 2021 (Figure 6).
| Figure 5: MA expects Rev increase in mid 20%s vs V's high teens in Q4 | Figure 6: MA's EPS to be significantly higher than that of Visa's in Q4 |
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| Source: Visa and MA Presentations | Source: Visa and MA Presentations |
2022 guidance for Visa was disappointing
Mastercard refrained from giving 2022 earnings guidance, probably saving it for its upcoming investor day meeting on November 10th. However, Visa delivered underwhelming outlook for 2022 with revenue expected to be in the high-teens (vs our c.20% growth) and EPS growth of c.20% (vs our >20% expectations).
| Figure 7: We estimate MA to increase EPS by 29% and 21% in 2022E and 2023E |
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| Source: AlphaTech Equities |
Valuation chasm between V and MA is justified
Mastercard has traded a premium to Visa in the recent past which we see as justified given its premium growth profile (Figure 8).
| Figure 8: Mastercard trades at a premium vs Visa given its higher growth profile |
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| Source: Koyfin |
We expect Mastercard to grow EPS significantly faster than Visa, evidenced by its recent Q3 2021 outperformance and Q4 2021 guidance.
| Figure 9: We expect Mastercard to outperform V's EPS growth going forward |
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| Source: AlphaTech Equities |
We upgrade our rating for Mastercard to "Neutral"
Mastercard is currently trading at 34x NTM PE multiple which is higher than its pre-pandemic range of 23 to 33x. However, applying its pre pandemic average NTM PE multiple of 28x on 2023E diluted EPS (by when we expect things to normalise post pandemic) we arrive at a price target of $360, imputing an upside of ~8%. We upgrade our rating to "Neutral" for Mastercard and see better value for investors elsewhere.
| Figure 10: We see a 7.6% upside for Mastercard on a 28x NTM PE on its 2023E EPS. |
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Source: AlphaTech Equities |
Conclusion: Since our initiation on MA and V last year on "Sell", the duo have underperformed the NASDAQ by >50%. We upgrade both stocks to "Neutral"
After initiating coverage on V and MA last year both stocks have significantly underperformed the NASDAQ by more than 50%. However, we see recent share price correction as correctly valuing the two payment processors accurately and upgrade our rating to "Neutral" for both stocks.
Between the two stocks, Mastercard trades at 5x premium to Visa on a NTM PE ratio which we see as justified given its premium EPS growth profile. Even though we are "Neutral" rated on both stocks, if we were pushed to choose one stock, we would prefer Mastercard over Visa.
This article was written by
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