MA Vs. V: Which Stock is Poised for Better Q4 Earnings?

The fourth-quarter earnings season is picking pace, with 26% of the S&P 500 members have reported results already, and another 24% slated to report this week. More specifically, the latest Earnings Preview shows approximately 400 companies, including 121 S&P 500 members, reporting their financial results this week.

For Business Services, Q4 earnings are expected to be up 6.8% from the same period last year on 5.0% higher revenues. This would follow 11.5% earnings growth in Q3 on 5.5% growth in revenues.

Let’s take a look at two important stocks, Mastercard Inc. MA and Visa Inc. V, which will release results on Feb 1. Notably, both companies are grouped under the Financial Transaction Services subsector which falls under the Business Services sector (one of the 16 Zacks sectors).

While, Mastercard will report fourth-quarter 2017 results, Visa is slated to release first-quarter fiscal 2018 numbers.

A Glance at the Industry

The global payments industry continues to undergo dynamic change. Technology and innovation is shifting consumer habits and driving growth opportunities in ecommerce, mobile payments, block chain technology and digital currencies.

Industry insiders expect demand for debit and credit cards and online payments to continue to surge in the years ahead, as the style of payments shift from cash and checks to plastic and electronic mode. An improving jobs market and low unemployment have set a positive trend in consumer spending by increasing the number or average purchase amount of transactions involving payment cards and devices. These shifts in macroeconomic factors bode well for the industry’s growth.

Despite the increased adoption of digital payments, cash continues to be the mainstream and makes up for nearly 85% of global transaction. This proves that the industry remains underpenetrated and provides ample scope for long-term growth.

Here, we discuss the price performance and fundamentals (financial and non-financial) of the two companies mentioned above to gain an idea about how they will fare this earnings season.

We rely on our Zacks methodology to help investors choose the better stock. Our quantitative model states that a stock needs to have a positive Earnings ESP and a Zacks Rank #3 (Hold) or better to deliver earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Price Performance

We have compared the price performances of Visa and Mastercard with the broader sector for the October-December 2017 period.

Shares of Visa returned 3.7% outperforming the broader sector’s growth of 3.4%. However, Mastercard’s shares gained only 1.7%, underperforming the industry.

Visa 4Q Factors at Play

Visa operates the world's largest retail electronic payments network, with more than 2.3 billion Visa-branded credit and debit cards in circulation globally.

Visa witnessed a revenue CAGR of 12.7% from 2008-2017. We strongly believe that the company will retain its revenue momentum in the fiscal first quarter on the back of its strong market position and attractive core business that continues to be driven by new deals, renewed agreements, accretive acquisitions, increasing spending via cards, shift to digital form of payments and expansion of service offerings.

The company expects annual net revenue growth of high single digits on a nominal dollar basis for fiscal 2018. We expect a year-over-year increase in revenues from each of its business lines — Data Processing, International Transaction and Service — the Zacks Consensus Estimate for each being $2.1 billion, $1.67 billion and $2.1 billion, up 13.3%, 12.4% and 11.2%, respectively.  

The company resolved approximately 75% of contract conversions by the end of fiscal 2017, and the remainder will be done primarily in the first half of fiscal 2018. As a result, client incentives in the first half of 2018 will be significantly higher than fiscal 2017. Thus the quarter should enclose higher client incentives.

Payment volumes should grow in the fiscal first quarter from the Costco and USAA deal wins. These deals drove U.S. payment volume growth up to the double-digit range in fiscal 2017. The Zacks Consensus Estimate of $1.97 trillion payment volumes is up 9.3% year over year.

Visa boasts an attractive earnings surprise history. It beat estimates in each of the trailing four quarters at an average of 8.13%. It is depicetd in the chart below:

Visa Inc. Price and EPS Surprise

Visa Inc. Price and EPS Surprise | Visa Inc. Quote

Visa has an Earnings ESP of +0.15%. This positive ESP coupled with the company’s favorable Zacks Rank #3, reinforces our confidence in an earnings beat this quarter. (Read more: Will Revenues, Payment Volumes Drive Visa Q1 Earnings?).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Mastercard 4Q Factors to Consider

Mastercard is one of the world's largest payment solutions companies, processing transactions from more than 210 countries and territories and in more than 150 currencies. It commands a well-established brand name and extensive merchant-acceptance network.

We expect higher net revenues primarily driven by increases across its revenue categories, the accretive impact of acquisitions, higher switched transactions and improved gross dollar volumes. The revenue growth, however, will be offset to a large extent by higher operating and personnel expenses, reflecting continued investment in strategic initiatives.

The company's efforts in expanding its services business, which has been posting strong earnings, are its differentiators in the market. Higher utilization of the company's service offerings led to revenue acceleration in the previous quarter, and the same is expected in the quarter to be reported.

The Zacks Consensus Estimate for Gross Dollar volume which measures all Mastercard Credit Charge and Debit programs, and includes purchase volume plus cash volume, one of the main revenue drivers, is expected to be $1.36 trillion, up almost 11% year over year.

The company boasts an attractive earnings surprise history. It surpassed the Zacks Consensus Estimate in each of the four reported quarters at an average of 5.84%. This is depicted in the chart below:

Mastercard Incorporated Price and EPS Surprise

Mastercard Incorporated Price and EPS Surprise | Mastercard Incorporated Quote

Mastercard has an Earnings ESP of +0.33%. A positive ESP coupled with the company’s favorable Zacks Rank #2 (Buy) makes the case for an earnings beat very strong.(Read more: Mastercard Gears Up for Q4 Earnings, What's in Store?).

Our Take

Per our proprietary model, Visa and Mastercard are both likely to deliver an earnings beat in the to-be-reported quarter. Investors should rather focus on the fundamentals of these stalwarts to take any decision.

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