Shares of Visa (V) and Mastercard (MA) have held up better than the market as a whole this year, as resilient consumer spending has buoyed the payment-service giants.
While the S&P 500 has dropped 20% year to date, Visa and Mastercard have both slipped only 9%.
Wells Fargo analysts are bullish on the stocks. Accelerating cross-border travel should boost earnings, they wrote in a commentary.
“This upside adds to the list of relative positives that make the networks great defensive names to own in this uncertain environment,” the analysts said. Inflation is one of those positives.
“And … a recession would only be a high-single-digit [earnings] hit, meaning normalized global travel could offset much of the impact,” they said.
Cross-Border Travel Forecasts
Cross-border revenue growth has historically been in the low teens for Visa and the high teens for Mastercard, the analysts said. But the Wall Street consensus calls for annualized growth of just 9.4% to 9.9% for 2019 through 2024.
“If the networks were to simply get back to long-term growth, [earnings] upside could be 6% for Visa and 12% for Mastercard,” the analysts said.
“And in our bull case, where cross-border revenue growth accelerates post-pandemic, due to [rising] e-commerce, [earnings] upside could be 9% for Visa and 16% for Mastercard.”
Also, “not only are cross-border travel volumes spiking, but they are the highest yielding product for the networks,” the analysts said.
“The best yielding is inbound U.S. travel, which should see a boost from the recent change to drop the covid test requirement. And regions such as Asia are just getting going with inbound/outbound travel only at 60% of 2019 [levels], a ratio that should easily be north of 130%.”
Defensive Qualities Can Help
Given the defensive qualities of the two stocks, “if we see more economic weakness, there could be further rotation into these names,” the analysts said.
They don’t see financial technology companies as a threat to Visa and Mastercard. “We think the market got it backward. We see the networks’ moat as very strong, as new fintechs create more touch points for them.”
Investors are concerned about valuations. But “a mid-20s price-earnings ratio is very attractive for companies likely to grow earnings at 20% [annually] for the foreseeable future,” the analysts said.
Mastercard trades at about 26 times their 2023 earnings estimate, and Visa at 22.5.
The analysts have a price target of $450 for Mastercard shares and $280 for Visa. Mastercard recently traded at $328 and Visa at $197.
The author of this story owns shares of Mastercard.
