Both Visa (V) and MasterCard (MA) were rising on Monday, thanks in part to upgrades from Robert W. Baird.
Analysts David Koning and Adam Dahms boosted their opinions on both stocks to Outperform. They have a $245 price target on Visa, and note that the risk/reward has become more attractive, in our view, as the stock enjoys strong secular tailwinds in its business model, solid free cash flow generation, and what they see as exaggerated concerns about regulatory and competitive issues. They call the stock's recent pullback as an attractive entry point, given the stock's "compelling valuation."
Read more detailed estimates below:
Strong business model/solid balance sheet:
We think EPS growth in the mid-teens is sustainable over time behind roughly 10%+ revenue growth (the international segment is now about 50% of revenue and can grow rapidly).
The strong balance sheet/FCF typically in excess of earnings allows for strong buyback activity (could comfortably add 5%/year to EPS) or could allow for the accretive purchase of Visa Europe.
Recent fears about the stock might be a bit overblown:
Regulatory: Risk of potential share loss due to changes in the exclusivity rules did not materialize. The US Appeals Court decided to keep existing rules intact.
MCX: Although some share loss is certainly possible, we do not see overly material displacement of V/MA as a realistic outcome.
Russia: Full displacement is unlikely so long as consumers continue to use V/MA (acceptance largely consumer driven). Russia is likely <1% of revenue, not very impactful regardless of displacement.
CQ1 weakness: Credit card data from JPM/WFC last week showed CQ1 volumes largely steady (relative to CQ4). We considered some deceleration likely this quarter.
Valuation appears compelling at these levels:
The stock has underperformed the S&P by ~10% YTD (currently trades at +33% premium to NTM S&P, lowest level in the last 12 months and below its three-year average premium of +42%). – We view year-out risk/reward as $185-275 (about 18-25X NTM P/E range).
The risk/reward proposition is also attractive for MasterCard, they write, citing the same factors—secular tailwinds, FCF, overblown fears, and compelling valuation—in their upgrade.
Their thoughts:
Strong business model/solid balance sheet:
MA consistently generates strong FCF in excess of EPS (FCF conversion averaged 114% of EPS the last four years), no debt.
Recent fears about the stock might be a bit overblown:
MCX: Although some share loss is certainly possible, we do not see an overly material displacement as a realistic outcome if/when MCX rolls out its offering.
Litigation: Lawsuits from large merchants that opted out of the settlement are a reasonable concern, but we do not expect a very significant impact (much over $3 billion is doubtful in our view).
Russia: Full displacement is unlikely so long as consumers continue to use V/MA (acceptance largely consumer driven). Russia is likely a small percentage of revenue, not very impactful regardless of displacement. CQ1 weakness: Credit card data from JPM/WFC last week showed CQ1 volumes largely steady (relative to CQ4). We considered some deceleration likely this quarter.
Valuation appears compelling at these levels:
MA has underperformed the S&P by ~17% YTD (currently trades at a 39% premium to the S&P, the lowest level in the last 12 months and below its three-year average premium of +43%).
We view risk/reward as attractive at these levels given MA’s consistent execution, strong balance sheet, solid FCF generation, and ability to deliver double-digit revenue/EPS growth.
They have an $83 price target on the stock.
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