For all intents and purposes, earnings season begins Friday, when some of the big banks and financial companies report their first-quarter results. These big banks typically set the tone for the entire quarter, as banks are often a bellwether for the performance of the economy.
Right around the corner in the next few weeks we’ll see quarterly results from another bellwether sector. Payment processors or credit-card companies typically give insight into consumer spending and confidence.
While the major payment processors are all typically good investments, there is one that stands out as the best buy right now, which is Visa (NYSE:V). Here’s why.
Visa has lagged its competitors
The three major credit-card companies are generally good buys in my book, for the most part. Of course, it depends on their valuations and the economic situation at any given time, but right now, Visa, Mastercard (NYSE:MA) and American Express (NYSE:AXP) all look pretty good.
The fourth major credit-card company, Discover Financial Services (NYSE:DFS), is in the process of being acquired by Capital One (NYSE:COF), and there are still a lot of regulatory hoops to jump through. If or when that deal does go through, it could change the playing field over time, but we’ll cross that bridge when we get to it.
However, among the big three, Visa’s stock has lagged both Mastercard and American Express year to date and over the past year.
American Express had a record year in 2023 in terms of revenue and earnings, benefiting from a spike in travel demand and an increase in net interest income due to higher interest rates. It should be noted that American Express has a closed-loop network, so it is also a lender and issuer. Visa and Mastercard are not lenders or issuers; both are just payment processors. Thus, while they do not generate interest income on loans, they also do not have credit risk like American Express.
As such, Mastercard surged in comparison to Visa after it posted higher revenue and growth rates in Q4 and for fiscal 2023 than Visa did. In the most recent quarter, Visa recorded 9% year-over-year revenue growth and an 8% increase in adjusted net income growth for the quarter that ended Dec. 31. Meanwhile, Mastercard posted a 13% increase in revenue and a 17% gain in adjusted net income. Mastercard also had a slightly better outlook for 2024.
However, one of the big reasons that Visa is the best buy of the three right now is its valuation.
The best value among credit-card stocks
Another reason that Mastercard has outperformed Visa this year was that its guidance for 2024 was slightly better. However, I don’t think the performance gap is significant enough to warrant the higher multiple that Mastercard currently trades at. Mastercard is trading at 40 times earnings, while Visa is at 31. In terms of forward P/E ratios, Mastercard is at 32, while Visa is at 27.
Given the fact that these are both tremendous companies with huge earnings power, I’d favor the one with the lower multiple, Visa.
It should be noted that American Express is trading at an even lower multiple — just 16 times forward earnings. However, I’m wondering about the impact of the 8% cap on late fees for credit cards that the Consumer Financial Protection Bureau recently imposed, as this affects banks and issuers like American Express more so than Visa or Mastercard. It will be interesting to hear more on the potential impact on American Express’ Q1 earnings call.
To reiterate, I like all three of these stocks, and all of them would make a fine addition to a portfolio, but right now if I had to pick one, I’d favor Visa.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
