{"id":30751,"date":"2012-07-10T16:59:43","date_gmt":"2012-07-10T20:59:43","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/07\/visa-and-mastercard-underlying-macro-trends-still-in-place-by-charles-lewis-sizemore-cfa\/"},"modified":"2012-07-10T16:59:43","modified_gmt":"2012-07-10T20:59:43","slug":"visa-and-mastercard-underlying-macro-trends-still-in-place-by-charles-lewis-sizemore-cfa","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/07\/10\/visa-and-mastercard-underlying-macro-trends-still-in-place-by-charles-lewis-sizemore-cfa\/","title":{"rendered":"Visa and MasterCard: Underlying Macro Trends Still in Place by Charles Lewis Sizemore, CFA"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

\u201cGimme what I need, uh, MasterCard or Vi-suh.\u201d<\/em><\/p>\n

From Wyclef Jean\u2019s \u201cPerfect Gentleman\u201d<\/p>\n

The U.S. consumer is in a bit of a pickle.\u00a0 Jobs are not particularly easy to come by\u2014the June jobs report showed unemployment sticking at 8.2% and only 80,000 new jobs created for the month\u2014and the economy remains sluggish.\u00a0<\/p>\n

True, the average American family carries less debt than they did a few year years ago, but their net worth hasn\u2019t exactly grown much either.\u00a0<\/p>\n

In short, the prognosis for the consumer is bleak.\u00a0<\/p>\n

Retail stocks have held up relatively well, all things considered, though higher-end luxury retail has taken a beating.\u00a0 Long-time Sizemore Investment Letter<\/em> recommendation Coach ($<\/span>COH<\/a>)<\/strong> is down nearly 30% from its 2012 highs, and competitor Michael Kors ($<\/span>KORS<\/a>)<\/strong> is down by over 16%.\u00a0 Investors fret that a slowing economy\u2014and in particular slowing Chinese and emerging market economies\u2014will lead to a disappointing string of quarters for purveyors of expensive discretionary purchases.<\/p>\n

Yet amidst the bearishness towards bling, Visa ($<\/span>V<\/a>)<\/strong> and MasterCard ($<\/span>MA<\/a>) <\/strong>have been notable bright spots.\u00a0 Visa is just 1-2 good trading days away from a new all-time high, and MasterCard is not far behind.\u00a0<\/p>\n

There are a lot of high expectations built into the stock prices of both credit card companies.\u00a0 Visa sells for 19 times trailing earnings and MasterCard for a lofty 27 times trailing earnings.\u00a0 Forward estimates put the ratios at a more reasonable 17 and 16 times earnings, respectively, though both are well above the average for the S&P 500.<\/p>\n

The optimism is not unwarranted.\u00a0 Both companies are debt free. Visa enjoys mouth-watering operating and profit margins of 60% and 42%, respectively, and MasterCard\u2019s profitability is only a hair\u2019s breadth lower.\u00a0\u00a0 Both also enjoy returns on equity that would be the envy of any company outside of the technology sector.\u00a0 In short, both companies deserve to trade at a premium to the broader market.<\/strong><\/p>\n

Still, with so much optimism baked into the stock price, a slight earnings miss by either could send shares tumbling in the short-term.\u00a0 This is always the risk you run when buying a \u201chot\u201d stock, and I would be wary of it as we enter earnings season.<\/p>\n

Any sustained weakness should be viewed as a fantastic buying opportunity.\u00a0 When I made Visa my pick in InvestorPlace\u2019s 2011 \u201c10 for 2011\u201dstockpicking contest, I noted two durable macro trends that are still very much in place:<\/p>\n

    \n
  1. The\u00a0\u00a0 transition to a global cashless society<\/li>\n
  2. The rise of the emerging market consumer<\/li>\n<\/ol>\n

    The first point should be obvious.\u00a0 Even in the United States, where credit and debit cards are ubiquitous, roughly 40% of all transactions are conducted with cash or paper checks.\u00a0 Not all transactions will ever be captured with credit and debit cards, of course, but with internet commerce growing relative to \u201cbricks and mortar,\u201d you can bet that the percentage will grow.\u00a0<\/p>\n

    Consumers without access to traditional credit or banking services are embracing prepaid cards, branded with the Visa and MasterCard logos, and both companies are experimenting with ways to let consumers pay at retail cash registers using their mobile phones.\u00a0<\/p>\n

    This is a long way of saying that even if overall consumer spending growth is tepid, growth in electronic payments has plenty of room to grow.<\/p>\n

    The second point is the one I find the most promising, however.\u00a0 Credit and debit card usage is soaring in virtually all major emerging markets as incomes rise and consumers join the ranks of the global middle class.\u00a0 Both Visa and MasterCard stand to benefit from this trend, though Visa has the better presence globally.\u00a0 Visa expects to get more than half of its revenues from overseas by 2015, and the overwhelming amount of this will come from emerging markets.\u00a0<\/p>\n

    Visa is what I call a classic \u201cemerging markets lite\u201d<\/strong> investment.\u00a0 You get all the benefits of emerging markets growth but without the volatility and headache of investing in emerging markets directly.<\/p>\n

    Both Visa and MasterCard are due to report earnings within the next month.\u00a0 I will be curious to see how the management of each addresses the effects of the economic slowdown in China and the rest of the developing world.<\/p>\n

    I suspect that, once the numbers are sorted, it will be clear that Chinese imports of iron ore and copper are in a protracted decline, but Chinese credit and debit card swiping are healthier than ever.\u00a0<\/p>\n

    In the meantime, I reiterate my recommendation to buy shares of both companies on any protracted weakness.<\/p>\n

    Disclosures: Sizemore Capital holds shares of Visa and Coach.<\/p>\n

    If you liked this article, consider getting Sizemore Insights via E-mail.\u00a0<\/strong><\/a><\/em><\/p>\n

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