Visa, MasterCard: Earnings Preview

Visa and MasterCard are set up to report their quarterly results this week and analysts expect profit growth in the double-digits from both firms.
By Laurie Kulikowski ,

SAN FRANCISCO and PURCHASE, N.Y. (

TheStreet

) --

Visa

(V) - Get Report

and

MasterCard

(MA) - Get Report

, two resilient names in the financial sector, are up next on the earnings calendar and Wall Street is expecting the two payment firms to continue to post solid results for the December-ending quarter, particularly as the economy showed signs of improvement.

The average estimate of analysts polled by

Thomson Reuters

calls for Visa report earnings of 91 cents per share, a performance that equates to roughly 17% growth year-over-year, when it releases its latest numbers after Wednesday's closing bell.

Meantime, of the 31 analysts that cover MasterCard, on average, the firm's fourth-quarter earnings are expected to rise 32% from a year ago to $2.47 a share, according to

Thomson Reuters

. MasterCard reports before the opening bell on Thursday.

Both firms held up comparatively well throughout the economic crisis -- with Visa even daring to go ahead with its initial public offering in the thick of the crisis in March 2008. During the final quarter of fiscal 2009, the economy began to show signs of stablization and improvement and this should contribute positively to the bottomline for both companies. However, the wildcard for Visa and MasterCard remains a continued high unemployment rate, which greatly influences consumer spending patterns.

Analysts are pointing to improved -- albeit still negative -- credit card metrics in U.S. sales and purchase volumes at the four largest credit card issuers,

JPMorgan Chase

(JPM) - Get Report

,

Citigroup

(C) - Get Report

,

Bank of America

(BAC) - Get Report

and

Capital One

(COF) - Get Report

, during the December-ended quarter as evidence that Visa and MasterCard likely did reasonably well.

Credit trends in terms of the growth in delinquent loans and net loans charged off also seem to be stabilizing. Unlike rivals

American Express

(AXP) - Get Report

and

Discover Financial

(DFS) - Get Report

, neither Visa nor MasterCard take on credit risk in their portfolios as they leave the business of issuing cards to their financial institution partners.

Both MasterCard and Visa collect fees, not only in the form of set prices to their financial institution clients, but also for each transaction processed.

Shares of Visa are down more than 4% since the beginning of the year, while MasterCard have fallen 1% over that period, but analysts are generally bullish. Both companies offer attractive investment opportunities as they continue to benefit from the global trend of consumers and businesses to shift from cash and check to electronic forms of payment and increasing global transactions.

"Visa's relatively large concentration in debit gives it a lead over MasterCard for total card volume growth as debit card growth exceeds that of credit cards. However, MasterCard's higher exposure to international markets makes it a larger beneficiary of the weak dollar compared to last year," according to David Long, an analyst at William Blair & Co.

Shares of MasterCard currently trade at 18.9 times Long's 2010 earnings estimates of $13.55 a share, while Visa shares trade at 22.3 times Long's calendar 2010 estimate of $3.60. Both should be able to deliver performances this year worthy of commanding these high premiums, Long wrote in a research note last week

"We expect worldwide purchase volume on credit and debit cards to return to double-digit annual growth by 2010," Long wrote. "We forecast even higher EPS growth for the two companies as profit margins expand."

U.S. credit card volume declined 3% in the fourth quarter vs. an average decline of 13% during the first three quarters of the year, according to Long.

"We expect total U.S. card volume (credit and debit) to turn positive in the December quarter after four quarters of year-over-year declines," he wrote.

Transactions processed at the two payments firms should also come in strong. Visa's processed transactions are expected to rise 10.5%, Long wrote. MasterCard's processed transactions could increase in the 8-9% range vs. a year earlier, according to other analyst estimates.

Investors may be "underestimating" non-U.S. volume growth for both payment firms. Non-U.S. volume growth and revenue growth will be positively impacted by the weakened dollar. "Because more of MasterCard's volume (57%) comes from outside of the U.S. than Visa (40%), we see more upside to MasterCard's revenue," Long wrote.

Visa reports its service fee performance on a one quarter lag, meaning the full impact of a weaker dollar will not be entirely realized until the quarter ends in March. (Visa's management previously has said that it may remove this lag in 2010.)

Another influence on the numbers is that Visa and MasterCard at times see their customers flip-flop between debit and credit programs -- a common enough routine -- but the impact will be greater for MasterCard as it seeks to bolster its debit business, particularly in the United States.

Analysts have predicted that MasterCard may lose as much as 10% of its U.S. debit volume as JPMorgan migrates former Washington Mutual card customers to Visa's platform. Additionally, Citizens Bank, a unit of

Royal Bank of Scotland

(RBS) - Get Report

, over the summer converted to Visa's debit platform, according to analysts.

Last month, however, MasterCard struck back when

SunTrust Banks (STI) - Get Report

agreed to convert its debit platform to MasterCard from Visa.

JPMorgan analyst Tien-tsin Huang estimates that the combination of the WaMu and Citizens' debit card platform contract losses could equal a roughly $40 billion drain to MasterCard's annual domestic debit volume. The SunTrust win should add about $10 million in volume, which along with other wins will go towards offsetting some of these losses, he noted.

On the expense side, analysts are most interested in the payment firms' marketing and advertising expenses, which are discretionary. Marketing and advertising costs are a key lever that both Visa and MasterCard successfully reined in during the crisis to offset lower purchase volume, particularly in credit. But as the economy improved in the fourth quarter, analysts will be looking to see just how much both firms ramped up advertising and marketing spending.

--Written by Laurie Kulikowski in New York.

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