Looking for alpha as we head into the final quarter of 2018? Visa (V) - Get Visa Inc. Class A Report and Mastercard (MA) - Get Mastercard Incorporated Class A Report could be the stocks that get you there.
Thursday morning, analysts at BMO initiated both stocks with an outperform rating, assigning a $187 price target to Visa and a $238 price target for Mastercard.
The targets imply roughly 25% upside for Visa, and a little more than 7% upside for Mastercard. However, if Visa does put together a massive run, it could bring Mastercard along for the ride, even though the latter has vastly outperformed the former this year and over the last 12 months.
Visa stock is up "just" 31% this year compared to the 47% surge in Mastercard stock. For the record, BMO is pretty bullish on the payments space in general, also initiating PayPal (PYPL) - Get PayPal Holdings, Inc. Report with an outperform rating and assigning a market perform rating to Square (SQ) - Get Square, Inc. Class A Report despite its monstrous 180% run so far this year.
Given those gains, what catalysts exists to drive Visa and Mastercard even higher?
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Why Buy Visa and Mastercard Stock
The first factor is the strong U.S. consumer. As the economy continues to churn out growth and as jobs growth continues to gain, more consumers have disposable income. That means more lattes from Starbucks (SBUX) - Get Starbucks Corporation Report , more clothes from department stores and more purchases on Amazon (AMZN) - Get Amazon.com, Inc. Report .
Alongside an improving economy and increasing work hours is a bump in wage inflation. So not only are Americans working more, but they're getting paid more too. That's a perfect recipe for retailers - and thus, Visa and Mastercard - as we head into the vital fourth quarter. The months between October and December are filled with various holidays, all of which encourage consumers to spend, spend, spend.
When confidence is high as it is right now, those consumers feel comfortable spending a few extra bucks. And that's not just a personal opinion, as many in the space feel that way. Target (TGT) - Get Target Corporation Report CEO Brian Cornell said on his company's latest conference call, "This is the best consumer environment I've ever seen." Macy's (M) - Get Macy's Inc Report management had this to say on its last quarterly call, "Based on the first half performance, our strong execution and the anticipation of continued healthy consumer spending, we are raising both sales and earnings guidance for the year."
These are big votes of confidence.
Last but not least, gasoline prices have been on the rise. I remember listening to several Visa conference calls between late-2014 through 2015, as management explained how the decimation in oil prices were dragging down gasoline prices at the pump. While this was a boon for consumers, it weighed on revenue growth due to Visa and Mastercard's business model, which charges an upfront fee plus a percentage of the total sale.
Now, though, prices are back on the rise. A massive spike might weigh negatively on consumer confidence, but thankfully, that's not the case here. Instead, average U.S. gas prices have slowly but steadily risen about 9% year-over-year and just under 11% in 2018. That should give a much-appreciated revenue boost to Visa and Mastercard as consumers pay more at the pump, but don't suffer enough to cut back on on other purchases.
The bottom line? Even after big runs in the stock price, Visa and Mastercard can continue higher as consumers feel confident, spend more in the ever-vital fourth quarter and pay a bit more at the pump.
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This article is commentary by an independent contributor. At the time of publication, the author had no positions in the stocks mentioned.