Despite International Concerns, Visa And MasterCard To Gain From U.S. Holiday Sales

January 28th, 2014 by Trefis Team
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Visa (NYSE:V) and MasterCard (NYSE:MA) are scheduled to report earnings on Thursday, January 30 and Friday, January 31, respectively. [1] We expect strong results from the card giants, helped by better-than-anticipated U.S. holiday season sales. Online sales through E-commerce retailers like Amazon (NASDAQ:AMZN) helped offset unfavorable weather conditions and a 15% decline in customer traffic, as 2013 holiday retail sales went up 3.9% over the prior year. [2]  Card companies Discover Financial (NYSE:DFS) and American Express (NYSE:AXP) gained from the holiday shopping spree. Discover recently reported a 3% increase in sales volume for the three months ending September while AmEx reported a 9% increase in card-member spending in the country. We believe that Visa and MasterCard will be able to replicate or even better the performance of their peers. MasterCard accounts for 10% of personal consumption expenditures in the U.S., while Visa accounts for a quarter of the spending. [3]

Our $75 price estimate for MasterCard and our $191 estimate for Visa are both in line with the current market prices.

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See Our Full Analysis for : Visa|MasterCard

Improving U.S. Economy

Americans have come out of their recession shells and are now willing to spend again; data released by the U.S. Department of Commerce shows that personal saving as a percentage of disposable personal income has gone down from 6.6% in the fourth quarter of 2012 to 4.9%. [4] This trend is a result of moderate improvements in the job market, which saw the unemployment rate dip below 7% in December, while wages and salaries increased 4% over the prior year. [5] Industry group The Conference Board reported an increase in consumer confidence through December, with sentiment regarding current conditions reaching a 5-year high. [6]

Both Visa and MasterCard have so far been able to capitalize on this trend; Visa reported a 10% increase in U.S. volumes for the three months ending September while MasterCard observed 9% growth. We expect both companies to maintain this growth through the December quarter.

Concerns Outside?

A possible slowdown in economic growth in emerging markets might affect MasterCard more than Visa. [7] More than 70% of MasterCard’s gross dollar volume (GDV) comes from outside the U.S., with developing countries in Asia and Latin America playing a big part. On the other hand, Visa is more focused on the U.S. with more than half of its GDV coming from the country.

However, we believe that increased penetration will allow Visa and MasterCard to maintain growth in international markets. Electronic penetration, at 60% of the personal consumption expenditures, is already quite high in the U.S., and future growth is expected to come from improving consumer sentiment. [8] On the other hand, penetration in fast-growing countries like India, Mexico, Brazil, Russia, Indonesia, South Africa and the UAE is still below 40%. The PCE growth rate has been around 10% in these countries for the last four years, but currency fluctuations have affected card companies. MasterCard, which generates close to 30% of its GDV from the Asia-Pacific region, reported a 16% increase in GDV last quarter. However, this growth was 22% on a local currency basis. Visa earns 45% of its international GDV from the region and reported an 8% nominal growth rate for the September quarter. On a constant currency basis, the growth rate was 13.5%. We both card giants to maintain a growth rate just below the 10% mark, which could improve in the coming years.

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Notes:
  1. Q1 2014 Visa Inc Earnings Conference Call, Investor Relations [↩]
  2. Holiday Retail Sales Come in at NRF Expectations, Press Release, January 14, 2014 [↩]
  3. Personal Consumption Expenditures, U.S. Department of Commerce: Bureau of Economic Analysis [↩]
  4. Table 2.1. Personal Income and Its Disposition (A) (Q) [↩]
  5. U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩]
  6. U.S. Consumer Confidence Rebounds in December, The Conference Board, Press Release [↩]
  7. Brent Crude Drops Amid Concern of Slowing Emerging Market, January 27, Bloomberg News [↩]
  8. Visa investor meeting for 2013 [↩]