Consumer Trends Good for Visa Stock
Visa (ticker: V) investors have to wait another week for the company's second-quarter earnings report, but analysts say the economic backdrop for credit card companies suggest Visa could put up some big numbers.
Visa and Mastercard ( MA) are both benefiting from healthy consumer spending trends and analysts say Visa is the cream of the credit card crop.
According to Bank of America analyst Jason Kupferberg, market sentiment and expectations are relatively high for Visa ahead of its earnings report, but Visa is likely to beat consensus earnings estimates.
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Kupferberg says SpendTrend transaction data from the second quarter indicates year-over-year card volume growth of 4.9 percent for Visa and MasterCard, the highest growth reading since 2012. In addition, U.S. retail sales growth in the second quarter was a solid 5 percent. Finally, U.S. gasoline prices climbed 20.1 percent year-over-year in the second quarter. Bank of America estimates that gasoline represents between 7 and 9 percent of total U.S. card volume for Visa.
At the same time the consumer backdrop has been extremely favorable for Visa, Kupferberg says the stock still offers long-term investors an attractive entry level.
"While we acknowledge absolute multiples have moved toward the higher end of the historical range, we view valuation as warranted given underlying growth rates, and on a [price-to-earnings-to-growth] basis, note shares trade at only a modest premium to the S&P 500," Kupferberg says.
He says Wall Street analysts tend to prefer MasterCard stock over Visa stock due to its superior earnings growth in recent quarters. However, Kupferberg says MA stock is currently trading at a 6 percent earnings multiple premium to Visa compared to its historic 6 percent discount, and Visa's consensus 2019 earnings growth estimates are roughly in-line with MasterCard's.
Also, Kupferberg says Visa could potentially see some unique upside from its European business.
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"We view the current discount as extended in the context of more similar growth rates for V and MA beyond 2018 (ie, EPS growth for 2019 is just 1.7 percent faster for MA), and note the last time Visa traded at such a significant discount to MA was the result of unexpected regulatory/legal developments rather than fundamental business performance," he says.
Bank of America has a "buy" rating and $155 price target for Visa stock.
Wayne Duggan is a freelance investment strategy reporter with a focus on energy and emerging market stocks. He has a degree in brain and cognitive sciences from the Massachusetts Institute of Technology and specializes in the psychological challenges of investing. He is a senior financial market reporter for Benzinga and has contributed financial market analysis to Motley Fool, Seeking Alpha and InvestorPlace. He is also the author of the book "Beating Wall Street With Common Sense," which focuses on the practical strategies he has used to outperform the stock market. You can follow him on Twitter @DugganSense, check out his latest content at tradingcommonsense.com or email him at wpd@tradingcommonsense.com.
