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Stocks have desirable attributes for any investor and benefit from premium valuation multiples.
Daniel Acker/Bloomberg
MasterCard
And
Visa
have been on a tear-yet their stocks remain cheap. Investors should take the opportunity to buy stocks.
It’s hard to overstate how attractive business activities are. Visa (symbol: V) and Mastercard (MA) operate competing networks that process hundreds of billions of credit, debit and other transactions each year by connecting consumers, businesses and financial institutions. They each take a percentage of the trillions of dollars in payment volume flowing through their networks. It no longer costs them anything to process an extra swipe on a network that already exists – every marginal transaction is almost entirely a profit.
Simply put, there is perhaps no bigger business than payment processing.
Equities have desirable attributes for any investor and therefore benefit from premium valuation multiples. Not This prime lately, though. Even after gaining 18% this year, Visa stock is earning about 25x its expected earnings for next year, compared to an average of 30x over the past five years and a 24x increase at the start of 2023. Compare this at
S&P500
19 times the earnings multiple today, compared to almost 16 times at the start of the year.
Visa’s current valuation multiple is around a 30% premium to the S&P 500, half of its historical average of around 60%. The picture is similar for Mastercard – it’s cheaper relative to the market and its own history than it has been for some time.
Nothing appears to have changed for either company to justify such a low multiple against the S&P 500. Visa has posted a mammoth profit margin of 55% in its last four reported quarters – $17 billion of net profit on $31 billion in revenue – a level that it can comfortably maintain a level that it can comfortably maintain while growing its sales by 10% per year. It’s a low-capital company: free cash flow was also $17 billion in the past year. Mastercard’s margins are about 10 percentage points narrower due to its smaller scale. Both companies have minimal net debt.
Current valuations present buying opportunities for both stocks. “The writedown in Visa and Mastercard valuations appears to be largely technical, as business momentum is strong – the networks have both delivered nine consecutive quarters of positive revenue and EPS surprises – and they face no risk. or threat of new or unusual disruptions that would put pressure on their valuation,” writes MoffettNathanson analyst Lisa Ellis.She has price targets of $320 on Visa shares, up 32%, and $490 on Mastercard, up 23%.
Investors don’t need to count on Visa or Mastercard’s valuation multiple returning to its historic premium – the anticipated earnings growth will be more than enough. Mastercard’s earnings per share are expected to grow nearly 18% annually over the next three years. Visas are increasing by 14% per year.
Barrons recommended buying Visa shares late last year, and they’ve returned about 19% since then, putting them about a full percentage point ahead of the S&P 500. We liked it then, and we still love him today. The below-par valuation provides another attractive starting point and removes some short-term risk. Is it worth it.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com