Comedian Rodney Dangerfield was famous for saying, “I can’t get no respect.”
Bank of America analysts say it’s payment-processing titans Visa (V) and Mastercard (MA) that aren’t getting enough respect these days. Visa has slid 8% since April 28, and Mastercard has lost 9%.
“While we appreciate the current degree of macro uncertainty, we believe Visa and Mastercard’s business is more all-weather than current Street perception,” the analysts said.
“Not all recessions are created equally, and in a somewhat mild/average recession scenario for the US and/or Europe, we believe Visa and Mastercard’s growth would be quite resilient.”
Revenue would suffer from a pullback in consumer discretionary spending during a recession, the analysts said. But, “the sheer diversification of Visa and Mastercard’s exposure (credit/debit, geography, merchant verticals) would likely cushion the blow,” they said.
Visa and Mastercard both “handily outperformed” the S&P 500 during the Great Recession of 2008-09, the analysts said.
“It is also noteworthy that Visa and Mastercard now earn about 21% (Visa) and 35% (Mastercard) of total revenues from value-added services, outside of the core transaction-driven network business,” they said. Those services are growing more than 20%.
Also, “both companies have consistently demonstrated their ability to effectively manage operating expenses when top-line pressures emerge,” the analysts said.
“In addition, the quality of the business model and the earnings is unparalleled in the sector, with huge free-cash-flow generation and extremely clean and flexible balance sheets.” They said.
In terms of valuation, Visa now trades at 24.8 times forward earnings, and Mastercard at 27.4 times. That represents a discount to their five-year historical averages, the analysts said.
Morningstar’s Take on Visa
Morningstar analyst Brett Horn assigns Visa a wide moat and puts fair value for the stock at $221. It recently traded at $202.
“Visa delivered a strong second quarter, as the company continues to see some bounce-back from its pandemic-related issues,” he wrote in a commentary.
“We think the relatively quick recovery supports our wide moat rating and highlights the favorable long-term secular trend for Visa.”
Further, “while the decision to exit Russia will likely be a bit of an issue in the coming quarters, we think the company should be able to continue to achieve outsize growth in the near term as headwinds fall off,” Horn said.
Morningstar’s Take on Mastercard
Horn also gives Mastercard a wide moat, putting fair value for the stock at $369. It recently traded at $345.
“Mastercard’s first-quarter results largely mirrored what we saw from Visa, as the networks continue to bounce back from the headwinds they have faced through the pandemic,” he wrote in a commentary.
“In our view, the relatively quick recovery supports our wide moat rating and highlights the favorable long-term secular backdrop for Mastercard.”
Just as with Visa, “the exit from Russia will be a bit of a drag this year, but even factoring this in, we expect relatively strong growth in the near term,” Horn said.
The author of this story owns shares of Mastercard.
