Payment-processing titans Visa (V) and Mastercard (MA) have markedly outperformed the overall stock market this year, as consumer spending has held up pretty well.
While the S&P 500 has dropped 17% year to date, Visa has slipped only 2% and Mastercard just 5%.
With Visa set to report its latest quarterly earnings July 26 and Mastercard scheduled for July 28, Bank of America analysts took the opportunity to offer a commentary about the two companies.
“Based on Visa's mid-quarter update on June 1, we believe V/MA's underlying business performance was generally tracking modestly ahead of expectations, but likely faced incremental headwinds from dollar strengthening,” the analysts wrote.
And the currency issue isn’t going away. “While we expect V and MA to reiterate confidence in their constant-currency growth guidance for fiscal 2022, we anticipate both will build additional foreign exchange headwinds into the outlook,” the analysts said.
Cross-Border Travel
As for cross-border travel volume, it already recovered in May to a doubling (up 108%) of 2019 levels for Visa, excluding intra-Europe travel, they said. In its most recent earnings call, MA disclosed that April cross-border travel volume was 110% of 2019 levels.
Looking at the big picture, “underlying trends for Visa and Mastercard are robust, driven by cross-border [spending],” the analysts wrote.
Many experts see a strong chance for recession. So what is the impact on the two payment giants?
“While V and MA are obviously highly levered to consumer spending, we believe they are positioned to perform well in a recession for multiple reasons:
1) “Acceleration in secular tailwinds of cash-to-card conversion in the wake of covid;
2) “A high degree of diversification across merchant verticals, discretionary versus non-discretionary spending categories and geographies;
3) “V/MA now earn 20%-30% of revenue from value-added services, separate from the core transaction-based business;
4) “V/MA have previously demonstrated the ability to quickly and decisively manage operating expenses and protect [profit] in the event of some top-line pressure; and,
5) “Both companies have unparalleled earnings, cash flow, and balance sheet quality.”
‘Slight Preference’
Looking at macro data for the second quarter, average U.S. bank-card-issuer volume growth (including credit and debit) totaled 11%, down from 16% in the first quarter, the analysts said.
“We think V and MA will deliver results at least in-line” with consensus earnings forecasts for the latest quarter, the analysts said.
They rate both companies buy, but have a “slight preference for Visa over Mastercard.” That’s because of “the current macro environment and relative valuations,” the analysts said.
“MA generates about 30% of volume from Europe, with V in the 20%-25% range, and the European economic outlook is arguably more at risk” than the one in the U.S. “V also now trades at a 12% discount to MA, compared to 7.5% over the past five years.”
The author of this story owns shares of Mastercard.
