The Financial Transaction Services industry continues to go through a major transition. Digitalization, ample growth opportunities and constant FinTech collaborations are the reasons behind the shift.
Over the years, the payment styles have shifted from tangible forms (cash and checks) to the digital mode. Payment processors are significantly gaining traction from non-cash transactions wherein payments are being accepted through NFC chips, payment apps, sensors, tracking devices, etc., backed by the evolving IOT (Internet of Things) technology. Meanwhile, artificial intelligence has helped the industry detect frauds, real-time approvals and reduce false declines. All have resulted in creating innovative payment experiences for customers. High investments in blockchain technology, ecommerce, mobile payments, customer-centric business models and digital currencies are driving revenues for the companies.
The industry is also gaining support from an improving jobs market, low unemployment and the relaxation of tax rate under Tax Cuts and Jobs Act. Moreover, the Consumer Confidence Index presently stands at 100.8. This should, in turn support healthy consumer spending going forward that would be highly beneficial for the payment and network industry, as more and more consumers are seeking to pay for purchases online or via mobile which should aid revenue growth for payment processsors.
A Top-Ranked Industry
The Financial Transaction Services industry looks attractive from an investment perspective. The industry carries a Zacks Industry Rank #114 (representing top 45% out of more than 256 Zacks industries). Our back-testing shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than two to one.
Here we focus on two major payment processors, namely, Mastercard Incorporated MA and Visa Inc. V, with market capitalization of $230.4 billion and $333.8 billion, respectively.
Both stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
It will be interesting to note which stock scores better. Investors interested in the same space may also take a look at Evertec, Inc. EVTC and WEX Inc. WEX, each stock carrying a Zacks Rank #2 (Buy).
Both companies have outperformed the industry in a year’s time. While shares of Mastercard have soared nearly 60.1%, Visa has surged 45.7%. Here, Mastercard performs better than Visa.
The price-to-earnings (P/E) value metric can be used for valuing payment processors. Compared with the industry’s trailing 12-month P/E ratio of 30.60, both Mastercard and Visa are overvalued. Yet, with a trailing 12-month P/E multiple of 34.98, Visa is relatively cheaper than Mastercard’s trailing 12-month P/E multiple of 39.34. This round clearly goes to Visa.
Both companies have been deploying capital in terms of dividend payments to add shareholder value. They also maintain a record of raising dividends at regular intervals.
Mastercard has a current dividend yield of 0.45%, lower than the industry’s average of 0.52%. Meanwhile, Visa has a dividend yield of 0.56%. Clearly, Visa has an edge over Mastercard here.
Mastercard has debt-to-equity ratio of 110.9, higher than Visa’s leverage ratio of 49.9 as well as industry’s average of 62.8. So, this round goes to Visa without any doubt.
Return on Equity
Visa’s return on equity of 36.09% lies below the industry average of 40.85%. However, Mastercard’s metric for the same stands at 103.82%. Return on equity — a profitability measure — reflects how efficiently the company utilizes shareholders’ funds. Therefore, between Visa and Mastercard, the latter is far better-positioned.
Earnings Surprise History
Considering a comprehensive earnings history, both companies have delivered positive surprises in each of the prior four quarters. Mastercard has an average earnings surprise of 9.57%, slightly outperforming Visa’s reading of 9.27%.
Though very marginally, Mastercard scores over Visa in this context.
Earnings Estimate Revisions & Growth Projections
Mastercard has seen the Zacks Consensus Estimate for 2018 and 2019 earnings being revised 0.15% and 0.27% upward, respectively, over the past 30 days.
Meanwhile, the same for Visa has moved 0.4% and 0.2% north, each for 2018 and 2019 over the same time frame.
For Mastercard, the consensus estimate for 2018 earnings per share is pegged at $6.41, translating into year-over-year growth of 39.9%. The stock has an expected long-term earnings per share growth rate of 19%.
For Visa, the consensus mark stands at $4.61 for current-year bottom line, reflecting a year-over-year increase of 32.4%. The stock has an expected long-term earnings per share growth rate of 17.5%.
This round is biased toward Mastercard.
Our comparative analysis shows that Mastercard is better positioned for growth than Visa on the basis of leverage ratio, price performance, earnings surprise history and growth projections. Visa wins on valuation and dividend yield parameters. As the scale is tilted in favor of Mastercard, the stock discernably makes a better investment proposition.
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