What's in the Cards for MasterCard and Visa

 | Apr 30, 2013 | 12:00 PM EDT
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The financial sector is one of the most cyclical and volatile in the equity markets. So it is quite difficult to find a stable company that doesn't have so much cyclical exposure to the consumer and to credit.

American Express (AXP), Discover Financial Services (DFS), MasterCard (MA) and Visa (V) have excellent prospects, since people will use their products and services no matter what part of the cycle the economy is in. This earnings season, American Express and Discover both beat on both the top and bottom lines, and both have shown that the consumer continues to be confident and positive about retail and credit. MasterCard and Visa both report Wednesday, and while these two are great names to own in any cycle, we will break them down to see if one can provide more of bargain or value play than the other.

From a fundamental view, MasterCard currently holds a price-to-earnings multiple of 24, compared with the 16 multiple of the S&P 500 index. This signals that it is rich compared with the market as a whole and with its industry. It has had a steady increase in earnings per share, though it hit a bump in the fourth quarter of 2012. Revenue was stagnant throughout 2012, and consensus estimates came in the same way. Cash flow also hit a bump in the fourth quarter, while its dividend maintained its course. Profit margins remained solid.

That being said, from a year-over-year perspective, MasterCard has been hitting on all cylinders. EPS has gradually improved year over year in the past three years, and 2013 consensus estimates have kept pace so far. From an annualized five-year perspective, we are looking at around 22% growth rate on EPS. Revenue has continued its upward trajectory, while cash flow took a monster leap up from 2011 to 2012 and currently maintains its growth rate of around 13% over a five-year period. Annualized five-year growth rate for cash flow currently stands at around 21.5%.

One thing to keep an eye out for is that liabilities have been gradually increasing. As long as the company continues to deliver year-over-year for shareholders, this remains a very positive story for the long run. Below is a chart of MasterCard (blue) vs. the S&P 500 (orange) year to date.

Visa trades at a solid premium to the S&P 500 as a whole, with a 47 handle compared with a 16 handle on the S&P 500. Like MasterCard, it remains a solid name, but it is more volatile. Year-over-year EPS growth remains positive from a five-year period of around 19%, less than MasterCard's currently projected 22%. Most of that had to do with the poor third quarter that Visa reported in 2012, but we will wait for forward guidance. Revenue growth should continue to increase at a good trajectory, as card usage should really not shrink, and the company has done a nice job of increasing its dividend within the past year. Below is the run that Visa (blue) has had compared with the S&P 500 year to date.

From a fundamental view, I would prefer MasterCard at this point. Although Visa continues to grow overall, it remains richer than MasterCard on the basis of its P/E multiple, which is growing even faster. Profit margin at MasterCard was almost double that of Visa, while its price/earnings-to-growth (PEG) ratio is 1.4, compared with Visa's 2.5.

MasterCard's technicals agree with its fundamentals, as the cloud is bullish going forward from the daily (top) and weekly (bottom) cloud, while price continues to remain above the cloud. This indicates that from two different time horizons, MasterCard will likely remain attractive, supported by strong volume.

Looking at the point-and-figure charts, we see the price targets that have been taken out already. MasterCard just took out the $530 price target and is cooling off a bit. It has gradually taken out most targets, and it is looking next at $685. To get there, it would need to continue its year-over-year performance, and if it can do so, it has a good shot at getting there and possibly further.

MA Point and Figure

Looking at Visa, much can be said the same from the cloud perspective, as both the daily and weekly clouds are strong and bullish going forward.

Looking at the point-and-figure targets, price is currently hovering at the target level of $169, as it recently took out the $167 target. The next target to the upside is at $195, but a downside target remains at $145, because current price action and volatility signal indifference.

The technical perspective at this point, like the fundamental perspective, is going with MasterCard as the safer bet. On Wednesday we will hear what these two companies have to say, and we will see if they hold can true to their projected growth rates.



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