Hey I'm Jimmy in this video.
I'm going to walk through my analysis of visa
ticker symbol V.
This is a 28th video in our series where
we're analyzing all 30 stocks
in the Dow Jones Industrial Average.
You can see a link in the description below to all
the other videos in the series.
Then once we're done
with all of an analyzing all 30
companies what we're gonna do is we're going
to try to build three different portfolios
of value a dividend
and a growth portfolio.
Now I'm actually going to do something a bit outside of
the norm for our Dow 30 analysis
with this video
and that is I'm going to do two different companies
together. So I'm going to analyze both
Visa
and MasterCard
and I think that this is very useful because
whenever we analyze any of these companies
I think it's always important to compare it to peers.
This should be I'm hoping a good example
of how to compared to peers
and this should ultimately give us a better
understanding of the fundamentals of both
Visa and MasterCard.
And hopefully we'll be better equipped to
value both visa
stock and MasterCard stock.
And understand in
a more complete manner how we got there
and maybe we'll get lucky
and both of them will end up in some of the portfolios.
So let's start the basics.
So Visa is the top dog in
the industry. They have a market cap of about
350 billion versus MasterCard's
250 billion dollar market cap.
Visa has more debit cards more credit
cards.
They have a more expansive network of banks
and they process more transactions
but that doesn't mean that MasterCard
is down and out.
So let's take a closer look at some of the numbers.
So this is revenue for both Visa
and MasterCard.
Visa is in blue.
MasterCard is in orange.
And I also want to point out that these
right two groups of
bars. Well those are analyst estimates.
And I just took consensus estimates
for both this revenue chart
and for this net income chart.
Now you may notice that both revenue
and net income looked very similar
and at first glance this
is true. Now if we switch back to revenue
clearly Visa has more revenue
but look at what happens when we switch over to revenue growth.
Now there are a couple of things I want to clarify
before we go much further.
First off look at 2018
as you can see 2018 was much better for
MasterCard
and although they did perform better.
It's not quite as good as it looks on this
chart. Despite that this is what was reported
but MasterCard brought an important point in that filing
and that is that they recently adopted a new
accounting standard
and that accounting standard really helps
the appearance of revenue growth as
it affects the timing
and recognition of certain revenue
and incentive items that MasterCard
offers. So if we
were to adjust revenue to eliminate this
accounting standard this is where this chart would
look now. Still MasterCard looks better
just not as good as it looked at first glance.
Okay.
The next unusual situation occurred in 2017
and here we could see that visa looks
way better than MasterCard
and at first glance I just
assumed that this was going to be when visa
adopted the very same policy.
But much to my surprise it's not.
In fact this huge jump in revenue
for visa came from Visa's
acquisition of Visa Europe
and this one isn't
quite as simple to adjust
since what Visa did is they took Visa Europe
and just sort of mixed it into the rest of their business.
So we have no clean way of adjusting
it because they get a big that
happened about midway through 2017
so suddenly they've got a huge influx of revenue
that you know it's not just make the previous
year comparable.
Now I went back and listen to some analyst calls
and found some analyst reports that talked about this
time period.
And it seems that they had they adjusted
revenue growth to be about 13 percent.
So assuming that we take that for what it's worth
while this is where the chart would look now.
Now I actually hesitate in doing
this because
with the accounting change for MasterCard
Well in theory all that would
do is shift around the timing of revenue.
If you move it forward will then find next
year is going to be weaker so it'll all shake itself
out. But
with the 2017 numbers for visa
that was an acquisition that acquisition is still
there. So if we adjust 2017
lower do we adjust 2018 lower
too. And how could we possibly possibly
estimate that since visa doesn't
break out those numbers.
So that being said I'm actually going to switch this chart
back to the stated amount for Visa's
2017 numbers.
But before I do that
and the reason I walked us through this
is that I wanted you to see what I
saw when I was doing my research
and that is that MasterCard
had.
They have consistently outgrown
visa over the past few years
and that's key.
And there are some reasons behind that.
Okay now they're on the same page let's
switch this chart back.
And then before I go further I just
want to point out that if you're ever analyzing two companies
this type of thing is often needed
where if you ever see a huge disparity between
growth or revenue
adjustment or a huge margin shift
something must have happened.
It could be a changing accounting standards.
It could be an acquisition it could be
all sorts of things.
So if you ever see the numbers don't just take the stated
numbers I've made that mistake before I just take
the numbers
and say oh look at how much better they're doing.
Instead of doing that try to go back
and look at what it is.
If it on in almost all scenarios
the he's going to lay it out in their footnotes.
So that's the first place to start if you ever see something
like this. OK.
So why is MasterCard's growth better than Visa's
so Visa's revenue is dominated
by the United States
and Europe.
MasterCard also has a strong
presence in both those areas.
The key difference is how
thus how it is segmented so
Visa has about 50 percent
of their European revenues in the
United Kingdom.
While MasterCard has spread out amongst
many other countries including
the Nordic countries Italy
and Germany.
And this is important because all three of those areas
are growing at a much faster rate than the United
Kingdom is.
So this a lot from MasterCard
to consistently put up better
growth numbers than visa.
Also Visa has about 50
percent of their revenue coming from the
United States.
And while MasterCard only has about 35
percent of the revenue coming from the United
States. So relatively speaking
the U.S. is a lower growth region
much in the same way that the U.K.
is. OK now let's switch to margins
and as we could see this point goes to Visa.
Visa has consistently been stronger
than MasterCard when it comes to margins.
Visa has been more efficient than MasterCard
thanks to its size
and its scale.
They earn more money per
employee they spend a smaller
percentage of revenue
on marketing.
Just as an example of the past four quarters
visa spent about 5 percent of revenue
on selling
and marketing while MasterCard spent
about 7 percent of revenue.
So that's 2 percent right there.
So interestingly this just about summarizes
the main points for Visa
and MasterCard stock.
MasterCard has better growth
and Visa has better margins.
Visa is currently the top player in the industry.
But MasterCard is doing whatever it can
to gain ground.
Now let's try to come up
with a fair value for both MasterCard
stock and visa stock.
So right now Visa is trading at a forward PE
of about 29x.
Meanwhile MasterCard is trading at a
forward PE of about 32x.
So clearly the market favors
growth of margins since MasterCard's
trading a higher multiple than Visa's
but both this 29x
and the 32x are trade they're
historic highs going over the past like
three or four years.
Now if we switch over MasterCard's chart for a second
what we could see that back in this area
while the stock was trading about 24x
and frankly that sounds much more
appealing than the current 32x
switching over to Visa stock chart for a second.
Well once again it makes sense that Visa's
stock we currently be trading near
a high at a high multiple of
29x
and if we see down here well
down here the stock was trading at about 22x.
So just like MasterCard stock
I have to pause when consider paying 29x
for a stock that used to be trading
just recently at 22x.
Now both Visa and MasterCard stock
pay a dividend.
But both of them have a dividend
yield of less than 1%.
They also have good buyback programs.
So if that's the type of thing that gets you going.
Well that could really work.
But in my opinion I really
like both Visa
and MasterCard as companies.
I like visa from a value standpoint
and I like MasterCard from a growth
standpoint
but I like
them from the price three months ago.
Not right now.
So personally I think we should wait for
a pullback to get to that area.
But I do love the businesses that they're in
and they both seem to be in a very good position
in those businesses.
I would have thought that companies like PayPal
or Venmo would have taken business
away from both Visa
and Mastercard
but they've more integrated themselves
with the companies as compared to trying
to compete with them.
Now over the long run I'm sure
some very interesting competitors are going to pop
up. Maybe that's what the new
Apple credit card is all about.
But for now I think that both Visa
and MasterCard's position in the market
is fairly safe.
And I actually love both of these companies
at the right price.
But what do you think. Does MasterCard stock belong
in any of our portfolios.
Does visa stock belong in any of the portfolios.
Let me know what you think in the comments below.
Thank you for sticking
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Thanks so much. Now seeing the next video.