Consumer spending and confidence are trending higher
In March, consumer spending in the United States rose 0.2%, a decline from 0.7% in February but higher than analyst expectations. Despite that anemic gain, consumer confidence rose in April, according to the Conference Board’s confidence index, which rose to 68.1, ahead of the median analyst estimate of 61. This rise in U.S. consumer confidence indicates that a large number of households – the highest percentage since April 2011 – now project their incomes to rise over the next six months, which will translate into increased spending.
Meanwhile, German consumer sentiment hit a 5½ year high, with the benchmark index expected to rise to 6.2 in May, up from 6.0 in April. This means that despite Europe’s headaches, some people are still willing to shop.
Cashless society
The death of cash is imminent. Credit and debit cards have replaced the need for bills and coins, and smartphones with NFC chips are now being used as alternative methods of payment. Visa and MasterCard now offer NFC services in capable smartphones, which allow handsets to replace credit cards.
This year, the Asia-Pacific region is forecast to overtake the United States as the largest e-commerce market. Total online shoppers in the region are projected to rise to 2.5 times the number in the United States by 2016. Brazil, Russia and India are also seen as major markets where e-commerce is expected to evolve from cash-on-delivery to direct cashless payments.
All of these macro factors will directly or indirectly benefit the three largest credit card companies in the world.
Visa and MasterCard
The two largest credit card payment processors in the world, Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA), recently reported similar quarterly results. Visa’s net revenue rose 15% to $3.0 billion for its second quarter, while MasterCard’s revenue rose 8% to $1.91 billion. For its top line, Visa topped analyst estimates of $2.85 billion but Mastercard Inc (NYSE:MA) came up short of the expected $1.93 billion.
Visa Inc (NYSE:V)’s profit slid 1.7% to $1.27 billion, or $1.92 per share, while MasterCard’s rose 12% to $766 million, or $6.23 per share. Both companies topped analyst forecasts, which had called for Visa to earn $1.81 per share and Mastercard Inc (NYSE:MA) to earn $6.18.
Both Visa Inc (NYSE:V) and MasterCard are payment networks and not financial institutions. Instead of issuing their own cards, the two companies partner with banks and allow them to issue Visa or Mastercard Inc (NYSE:MA) branded cards. This arrangement allows Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) to profit from card transactions through swipe fees, which they charge merchants and banks, without shouldering any of the debt should customers fail to pay their bills. That burden falls on the issuing banks instead.
While both companies share that low-risk, high-reward business model, differences start to appear when we compare their credit and debit card businesses. Visa’s credit card business is considerably stronger than MasterCard’s both at home and worldwide. Visa has been able to maintain the lead in credit cards in the U.S. due to some banks, such as Citigroup Inc (NYSE:C), scaling back their credit card portfolios, dropping MasterCard while keeping Visa.
Yet MasterCard is winning the battle in debit cards, gaining significant market share thanks to new regulations that grant merchants more control over which debit cards they accept. Those changes have encouraged banks that once exclusively issued Visa debit cards to issue MasterCard and other payment network debit cards instead.
In the end, however, Visa still remains firmly ahead of MasterCard in terms of size and global reach. During their most recent quarters, Visa Inc (NYSE:V)’s total processed transactions rose 6% to 13.9 billion, while MasterCard’s rose 12% to 8.7 billion.
Today, MasterCard is the underdog looking for more partnerships from larger financial institutions. Visa is looking to reform its relationships with banks and merchants that have turned away due to its once byzantine pricing rules.
American Express
Meanwhile, American Express Company (NYSE:AXP) is not a pure payment processor like Visa Inc (NYSE:V) or MasterCard. The company has its own financial arm that assumes the debt and responsibilities of its customers. Therefore, American Express is often considered a more premium, exclusive card for affluent customers.
During the first quarter, American Express Company (NYSE:AXP) earned $1.15 per share, or $1.26 billion, on revenue of $7.88 billion. The company’s net income and revenue rose 2% and 4%, respectively, from the previous year. Just like MasterCard, American Express topped earnings estimates of $1.13 but fell short on revenue expectations of $8.0 billion.
This was a continuation of a year-long trend of soft revenue growth. Card member spending rose 7% after foreign currency adjustments, marking the fourth consecutive quarter of single-digit growth following nine quarters of double-digit growth. American Express Company (NYSE:AXP) is also often used for corporate expense accounts from large companies, and these accounts have now come under greater scrutiny as companies seek ways to reduce expenses and preserve margins. Approximately a quarter of American Express’ U.S.-billed business comes from corporate customers.
American Express Company (NYSE:AXP) has the lowest delinquency rate of all of the major credit card companies, but it still has to set aside a loan loss provision like banks to cover bad loans. During the quarter, the company set aside $497 million to cover bad loans, up 21% from the prior year.
The Foolish Bottom Line
In conclusion, let’s compare these three companies side by side to find the better value.
Forward P/E | 5-year PEG | Price to Sales (ttm) | Return on Equity (ttm) | Debt to Equity | Profit Margin | Dividend Yield | |
Visa | 19.53 | 1.24 | 10.39 | 8.77% | No debt | 22.46% | 0.80% |
MasterCard | 17.87 | 1.16 | 9.18 | 43.07% | 0.74 | 37.33% | 0.40% |
American Express | 12.98 | 1.17 | 2.52 | 23.16% | 310.53 | 15.12% | 1.20% |
Advantage | American Express | MasterCard | American Express | MasterCard | Visa | MasterCard | American Express |
Source: Yahoo Finance, May 2
Although Visa Inc (NYSE:V) initially seems like a good value based on top and bottom line growth, the stock is getting slightly overheated and is likely to pull back soon. Its rival Mastercard Inc (NYSE:MA) might be a better bet for value investors, since it has cheaper valuations and higher margins. Meanwhile, American Express is a good choice for longer-term value investors, and has the best dividend yield of the three. However, investors should keep in mind that American Express Company (NYSE:AXP)’ financial arm nearly sank the company during the 2009 crisis.
Investors should keep an eye on all three companies, since the rise of a cashless society propelled by e-commerce is making credit companies excellent long-term investments, regardless of short-term headwinds.
The article 3 Stocks for a Cashless Future originally appeared on Fool.com and is written by Leo Sun.
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