Visa, MasterCard: Earnings Preview

Visa and MasterCard are expected to report higher profits vs. year-ago results, thanks to an upswing in consumer spending
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SAN FRANCISCO (

TheStreet

) -- The recent upswing in consumer spending bodes well for upcoming quarterly reports from electronic payment networks

Visa

(V) - Get Report

and

MasterCard

(MA) - Get Report

.

Visa is slated to release its fiscal third-quarter numbers after Wednesday's closing bell, while its smaller rival, MasterCard will disclose its latest results on August 3.

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On average, analysts expect Visa to post a profit of 93 cents a share for the June period, nearly 40% higher than the comparable year-ago quarter. Revenue is expected to rise 20% to $1.97 billion, according to

Thomson Reuters

.

MasterCard's growth is anticipated to be more modest. Wall Street's consensus view is for earnings to rise 25% to $3.33 a share for the quarter. Revenue is projected to increase 8% from a year ago to $1.38 billion,

Thomson Reuters

says.

Purchase volumes at both card payment networks are expected to rise, particularly in credit cards (as opposed to debit purchases), despite unemployment remaining at record levels. During the height of the housing downturn, consumers pulled back on discretionary spending, limiting travel and purchases of electronics and other retail items.

"Benefiting from solid retail sales, international travel trends and still easy comparisons, we anticipate accelerating transaction, purchase volume, and cross border volume growth (also for MasterCard) for Visa during the June quarter," Glenn Greene, an analyst at Oppenheimer, wrote in a recent note to clients.

American Express (AXP) - Get Report

said last week that billed business during the June-ending quarter was back to "pre-recession levels." The charge card and payment services company reported better-than-expected quarterly earnings of $1 billion, or 84 cents a share.

American Express is known for its charge card product in which users (typically wealthier individuals and businesses) pay their balances in full each month. American Express also has a revolving credit card product, however, and lending to borrowers who missed payments took a bite out of earnings during the crisis, and the company has pulled back on the offering since then. American Express does not offer a debit card option.

"Despite growing doubts over the outlook for the pace of the consumer recovery given renewed fears of slowing economic growth and ongoing challenges in the labor markets, volume growth data for

second quarter from most corners of the payments industry (issuers, acquirers and retailers) in most cases matched our outpaced levels seen in

the first quarter, wrote Deutsche Bank analyst Christopher Mammone in a research note following AmEx's report.

Mammone calculates that average purchase volume from the leading Visa and MasterCard issuers rose roughly 5% year-over-year vs. around 4% in the first quarter. For Visa's largest bank customers --

Bank of America

(BAC) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

and

U.S. Bancorp

(USB) - Get Report

-- average purchase volume growth rose 9% year-over-year, Mammone calculates.

For MasterCard's largest issuers --

Citigroup

(C) - Get Report

and

Capital One

(COF) - Get Report

-- purchase volume fell 1%, according to Mammone. That trend, however, is an improvement from the direction in the first quarter. Mammone attributes this to MasterCard's greater reliance on credit card vs. debit card volume.

Bank of America, U.S. Bancorp and Capital One all noted "continued acceleration in their credit purchase volume growth, further signaling increased consumer willingness to use credit at the point-of-sale," he said in the note.

U.S. consumer spending trends are a good indicator of revenue trends for Visa and MasterCard, but investors should also note that both payment networks get revenue from transaction volume (as opposed to purchase dollar volume) and each has a significant amount of business located outside the U.S., where the transition from cash and checks to cards is behind the United States.

Visa

said in early June that global processed transactions on its electronic payments network leapt 15% in May versus the same period a year earlier, with increases to both debit and credit card usage.

Investors should also pay close attention to any commentary on how financial reform legislation will impact these companies.

Solid quarterly results from Visa "should provide temporary reprieve from the 'doom and gloom' sentiment that has plagued the payment networks the past few weeks," Tien-tsin Huang, an analyst with JPMorgan writes in a note.

He maintains outperform ratings for Visa and believes the shares are positioned for a "relief rally."

Huang prefers MasterCard over Visa currently due to the higher exposure to the U.S. credit card volume than Visa and less to debit card usage.

Visa shares were up 9 cents to $76.70 ahead of its report later today. The stock is down about 12% year-to-date, and analyst sentiment is mixed. Of the 19 analysts covering the shares, five are at strong buy, five are at buy, and nine are at hold.

--Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.