Visa Inc (NYSE:V) and Mastercard Incorporated (NYSE:MA) are two behemoths in the payments processing world, far larger than American Express Company (NYSE:AXP) and Discover. It is important to understand that Visa and MasterCard do not issue the physical credit cards, as that is the bank’s responsibility.
Banks like J P Morgan Chase & Co (NYSE:JPM, Bank of America Corporation (NYSE:BAC), or Wells Fargo & Company (NYSE:WFC) are the ones that physically issue the credit cards and allow the client to choose between Visa, or MasterCard, and sometimes also between American Express, and Discover. Both companies, V and MA, operate very similarly and the differences between the credit cards are indeed very small.
Both cards are very widely accepted in the vast majority of any country. Most of the time, interest rates, and rewards, annual fees, and other charges are dealt with through the bank that issued the credit card, not MA or V.
MA and V make their money when a retailer uses them as a payment method. In other words, they charge the retailer, or restaurant, or travel agency, or really any business. So, in the grand scheme of things, when the economy in the US is faring well due to more consumers spending, it translates to more transactions, which ultimately means one thing, more money for electronic payment companies.
MasterCard markets itself quite well, using their subtle slogan, “There are some things money can’t buy. For everything else, there’s MasterCard.” On the other hand, Visa has also ensured that it has its own succinct slogan, “It’s everywhere you want to be.”
But, pushing the marketing aside, which one is the more successful company, not just in terms of earnings or financials, but also in regards to popularity, global reach, benefits, rewards and security? We will be examining both electronic payments giants in hopes of coming to a conclusion not only of which company is better off in the long run, but also which company’s stock is a better investment.
MasterCard
Mastercard Incorporated (NYSE:MA) as most of us know, is a technology company in the global payments industry. The company is a network that connects financial institutions, businesses, retailers, merchants, governments, and consumers, by allowing them to use electronic forms of payments instead of physical checks and cash.
The financial transactions services giant is mainly known for its MasterCard brand, but few have heard of its Maestro and Cirrus services as well. The company also provides loyalty and reward programs and benefits, as well as information services and consulting. MA acquired Pinpoint Pty Ltd., a Sydney-based of loyalty and reward programs.
MA has had so many great years, and there is no doubt that MA has been an excellent holding for any investor, but is MA set to grow for the rest of this year, as well as for the future? We have to bear in mind that MA decided to split its stock for a ratio of 10:1 on January 22nd 2014. Thus far, unfortunately for stockholders, the stock price has never hit $82/share again, but that is not to say that MA has fallen off, or has weakened.
Still, it is also noteworthy to mention that China’s economic growth has slowed down this year. The retail sector for the previous quarter in the US has also taken the brunt of the damage.
The benefits of having a MA-branded credit card are many. MA offers even additional benefits to customers who have World or World Elite MasterCard-branded credit cards. Benefits may include complimentary breakfast, room upgrades, late checkouts, and internet service from MA’s World Elite Hotels and Resorts Portfolio. MA also allows its valued clients to use its Priceless Cities program, which offers cardholders access to sports, entertainment, shopping, and culinary events at specific cities around the globe.
Perhaps most importantly though, MA holders have to understand that the bulk, or vast majority of their benefits depend on which bank their credit card is issued from. For instance, the Barclay’s Barclaycard Arrival Plus World Elite MasterCard offers 2.2% rewards on every dollar spent when you claim rewards for travel (2 miles earned/$1, and 10% of those traveled miles are credited back to account holder when he or she redeems rewards).
Another plus, is there’s no foreign transaction charge, and despite the fact that there is a $89 annuity charge, MA gives cardholders the opportunity to earn 40,000 bonus miles when he or she spend $3000+ on purchases in the first 90 days, or first 3 months from the day the account was opened.
It would not be fair to forget the advantage of trip cancellation insurance, extended warranty, and travel concierge services. Another example would be Citi Simplicity, offered through Citigroup’s Citibank, Citi Simplicity MasterCard offers one of the lowest APR offers. There is no annual fee, and also 18 months without any interest, and a low 3% balance transfer fee, and as if that is not enough, there are no penalty APR or late fee.
This makes this card outstanding for those with credit card debts, or those who are looking into a big purchase that they would like to pay for over a long period of time.
MA’s financials have not been poor either. The company has a dividend yield of $0.44/share, and as of last quarter (ended 6/30), MA has made $2,377 million in sales, and a gross profit of $2,377 million, and a positive net income of +$931 million. MA retains a diluted net EPS of $0.80/share.
MA also has a forward P/E ratio of 25.47, and for last quarter, MA positively surprised the Zacks Consensus Estimate EPS of $0.77/share by +3.90%, or 3 cents ($0.80/share). A lot of analysts have downgraded their estimates for the current quarter’s (9/2014) EPS estimates, from $0.81/share to $0.78/share as of 90 days ago. As of now, MA has an Earnings ESP of 0.00%.
Visa
Visa Inc (NYSE:V) is a global payments technology company that also serves as a network platform for consumers, financial institutions, businesses, governments, and retailers. The network is so large, it is estimated about 200 nations use V for electronic payments, and they are essentially, part of V’s ever-growing network.
Many people have not heard of V’s processing network, VisaNet. VisaNet makes authorization, clearing, and settlement of payment transactions worldwide easier for the company. In addition, it also provides security and protection from fraud for account holders, and assured payment for merchants.
V also operates and manages an open-loop payments network in which Visa connects and manages the exchange of information and values between; issuers, which includes financial institution that issue Visa-branded cards or payment products to account holders, and acquirers, which includes financial institutions that contract with merchants to accept Visa-branded cards or payment products.
V offers a lot of significant benefits. Visa has standard cards, which do still come with benefits; however the significant benefits are paired with V’s Visa Signature line features enhanced security and confidentiality, as well as travel insurance policies. One of the perks of being a Visa cardholder is access to V’s Signature Luxury Hotel Collection, complimentary room upgrades, internet service, breakfast and late checking out. This is in many ways, very similar, if not identical to MA’s perks.
Visa is also well known for its rewards programs. Visa’s signature cards offer nice perks to cardholders on top of one’s bank reward programs. The Capital One Venture Rewards Credit Card has an attractive 2% flat rewards rate on all purchases, as well as a one-time bonus of 40,000 miles when you first sign up for the card, provided that one spends $3000+ on purchases within the first 90 days. It wouldn’t be fair not to mention the fact that there are no blackout dates, limits, or expiration dates on miles.
The Chase Freedom card is much more widely used than the Capital One Venture, and it has no annual fee. Chase Freedom is not a Visa Signature, but has a really good signup bonus of about $200 cash back, and gives almost 5% cash back on categories that are determined every 3 months. Categories can widely vary, from groceries, hotels, restaurants, to gas.
In addition to that, cardholders earn 1% back on everything, and get access to the Chase Ultimate Rewards Mall, which is a major boon, as it gives bonuses on online shopping at stores, from Express, to Starbucks.com, to Ralph Lauren.
V’s financials have not been too poor either. The company has a dividend yield of $1.60/share, and as of last quarter (ended 6/30), V has made $3,155 million in sales, and a gross profit of $3,155 million, and a positive net income of +$1,360 million. V retains a diluted net EPS of $1.51/share. V also has a forward P/E ratio of 24.09, slightly better than MA’s forward P/E ratio.
For last quarter, V positively surprised the Zacks Consensus Estimate EPS of $2.09/share by +3.83%, or 8 cents (posting $2.17/share). A lot of analysts have downgraded their estimates for the current quarter’s (9/2014) EPS estimates though, moving the consensus from $2.20/share to $2.10/share as of 90 days ago. As of now, V has an Earnings ESP positive surprise of +7.14%.
Industry Challenge
Challenges that MA faces, are not just limited or exclusive to MA. For example, the threat of hackers cyber attacking a retailers’ data, and hunting their purchases and card information is something that MA has to bear in mind, and seek to mitigate the risk by improving and protecting its clients’ security and confidential information on their cards.
The attack on Target Corporation (NYSE:TGT) earlier this year proved that consumers’ trust with credit cards may be at risk. The fact that that does not directly affect MA is valid, however, it does impact the social sentiment on blogs and websites such as StockTwits, which may in turn, hit traders and investors banking on MA. The same concept applies to V as well.
MA Stock vs. V Stock
To date, Visa has issued approximately a billion cards. It is almost twice in size as compared to MA. With a market capitalization of about $166.47 billion, V is far larger than MA’s $89.32 billion market capitalization. Although over the past 5 years, MA’s stock has consistently beaten and outperformed the S&P 500 by a wide margin, underestimating V’s potential is not in anyone’s favor.
V is lagging and trailing behind MA, but the potential to grow is there, especially with an expanding mobile payments market. V has done well, but not as good as MA, until this year. MA was not able to reach $82/share this year, which was the price adjusted to pre-stock split (10:1).
Visa is the largest credit card company by reach and market cap. V handles about 60 billion transactions per year in excess of 200 countries; however, is that necessarily a good thing? It is when the world economy is stable and growing, as consumers are spending more, however, when there is a huge global sprawl, it also leaves Visa more exposed to fluctuations in different global currencies, which could hurt V’s revenues and profit, and that is not to forget if the global economy is in a slump.
MasterCard’s stock is arguably more attractive than Visa’s stock if we are talking long-term, based on a few recent events. Many are bullish on MasterCard due to its equity buyback program which takes place normally during Q4 or January. MasterCard has also upped its dividend before the stock split, showing that the company is committed to shareholders. On the other hand, Visa maintains a larger stock buyback program, about $5 billion according to CNBC.
Another important aspect is acceptance. Visa and MasterCard are both very well accepted by almost anyone, and there are very few rare cases in which a retailer or a business will accept one but not the other. However, Visa does have the slightly better acceptance rates. Visa maintains a network of more than 28 million merchants, and 2 million ATMs, and despite the fact that MasterCard maintains more than 30 million merchants; Visa is more widely used and accepted internationally.
Bottom Line
For the vast majority of investors, MA and V both seem to be excellent for long term investing. It is likely that investors will be happy with the profits regardless of which stock they choose to invest in. both stocks currently maintain a Zacks Rank #3 (Hold).
Both companies have a great forward P/E ratio compared to the industry’s average of -95.20. Both companies are very similar and almost mimic each other in terms of movement related to the market. If the economy improves, both of them benefit, and vice versa if the economy falls. Investors should keep an eye out for acquisitions/mergers, or electronic payments deals with companies like Samsung, Apple Inc (NASDAQ:AAPL), Amazon.com Inc (NASDAQ:AMZN), that may give one stock an edge over the other.
After the stock split, Visa seems to be very slightly better to invest in for the short term, as it has recently witnessed a major pullback after the earnings report during last quarter’s conference call, which it still has not fully recovered from. All in all, both stocks are excellent for long-term investors.