Thoughts on Recent Earning Reports from Visa and MasterCard

Last week, both Visa (V) and MasterCard (MA) released their quarterly earning results. Here are some thoughts on their reports and the conference calls.

1) Economic Indicator

For a long time, consumer spending has been the driving force of American economy. Albeit the arguments that now finally comes the end of such an era, it is fair to say the consumer spending remains as the most accurate indicator of the economy. Many researchers publish reports, articles, statistics, etc. to track the economic activities, looking for all sorts of signs of the economic trend. But as a matter of facts, no indicators are more accurate than the financial results from Visa and MasterCard. Actually in my opinion, both companies themselves are the indicators.

There are two aspects of the consumer spending, the number of transactions and the total spending volume. I believe there are no entities capable of tracking these numbers as accurate as V and MA. The reasons? these numbers are their business and they simply occur on the information systems owned by the big two. On the other hand, Visa and MasterCard dominate the electronic payment market, which has been widely adopted across all industries. Listening to their conference call, you will hear them talk about virtually everything, the gas, the grocery stores, the fall of CircuitCity, the restaurants, the overseas travel, etc, somewhat their business represents the overall economic picture.

Then what does this mean for the investors in both companies? In my first article on my blog (read it here), I mentioned in the bear market, we pick companies capable of holding up well during the economic downturn, and benefiting the most from the economic upturn. At that time, I listed both MA and V as my favorites. Economic recovery means more consumer spending transactions and higher spending volume, which translate directly into the improved financial results from both companies. When observers read these numbers and conclude the economy is back to life, both companies have already harvested the fruits. From this perspective, we say both companies proceed the economic upturn, and not in a speculative manner, but in a concrete and logical manner. So if you believe the American economy will come back, these two stocks will be the ones definitely flying earlier and very probably, higher.

2) Visa's Advantage Over MasterCard

In my previous discussion about MA (here), we mentioned that the Visa's dominant market position gives it the competitive edge over MA. Since MA can't produce anything with real or perceived difference from Visa's products, the competition pattern somewhat mimics that between Intel and AMD. Now based on the recent reports, it seems the Visa's dominance in the debit market gives it another layer of advantage over MA.

When we look back, the logic seems to be really simple. We are experiencing the credit crisis. Consumers cut back in credit card usage, and resort more to debit cards. This simply is a big positive for Visa. Visa saw the growth in debit card revenue offset the negative results from credit cards, but MA doesn't have such a luxury. In addition,talking about the future growth in the international market, especially in the developing countries, we all know that the credit system is a lot more complex and sophisticated than the debit system. It requires a series of setups, establishments, regulations, etc, which normally take long time to mature. But the debit card system, basically only requires the card holders have cash in their bank accounts. Therefore, the debit card's growth usually proceed the credit card. On one hand, compared to MA, Visa's dominance in the debit card market will position it better to take advantage of these growth opportunities. On the other hand, not everything is so negative for MA. Visa's advantage is mostly in the developed countries, while in the emerging markets, the opportunities presented to both are equal.

One noteworthy interesting point. In MA's 2008 10K, they quoted the recent bank consolidations as one potential risk, but in Visa's earning conference, they confirm that they expect to be the beneficiary of such consolidations. This certainly reflects Visa's dominant position, but also servers as a sign of Visa's long-term, established, strong relationships with big banks, which is intangible, but might very well be another advantage over MA.

3) International Growth

Both companies posted strong growth in the international market. Their strong performance outside the US helped offset the weak US market, guaranteeing their stock will recover at a faster pace than the US economy. Actually the global diversification is another rule I proposed to apply to pick stocks during the recession.

4) Energy Play

Both companies noted the dropping gas price negatively affected their results.

Actually MA and Visa are all good candidates for energy play.

Many believe the future era will be featured by high energy price, in that case, both companies will be benefited from this trend. After more than 100 years, the human world has been built to be relying on energy. There is no short term solutions to change this fact. High gas price may reduce several trips to Florida, but the enormous basic need will still be there, and grow, when you count in the developing countries from Asia. Both companies benefited from the short time energy bubble we witnessed in 2007 and early 2008, and I won't be surprised to see the similar situation reappear in the near future.

5) The Unabated Trends: Go Plastic and More Transactions

I continue to hold and increased my holdings in MA and Visa during the economic downturn. The underlying theory is based on two beliefs. First, the worldwide worldwide secular shift from cash and checks to electronic forms of payment will be inevitable and fast. And second, when people scale back their spending, it may, on the other hand, boost the total number of transactions. The report from both companies confirmed such views.

6) Final Conclusions

- Both companies delivered very solid performance, and Visa is even more impressive.
- I won't say MA is cheaper than Visa. I am holding onto my old opinion, Visa deserves a higher multiplier owing to its advantage over MA.
- Both stocks are not cheap. But I think the overall market may continue to push them higher.