Visa, Mastercard Still Have Bulls Charging

NEW YORK ( TheStreet) -- The economic recession rolls on, but Wall Street is still bullish on two financial companies that have weathered the financial storm -- Visa ( V) and Mastercard ( MA).

It's no secret that as the recession continues, analysts expect declines in Visa and Mastercard's purchase volumes, specifically from their U.S.-based credit card businesses and lower discretionary purchases on credit and debit cards. Many large card issuers including JPMorgan Chase ( JPM), Bank of America ( BAC) and Citigroup ( C) experienced declining credit card purchases from strapped consumers. Still, the increasing use of debit cards for everyday purchases and the continuous transition from cash to electronic forms of payment present a tailwind for both companies.

Analysts, on average, expect double-digit declines in profit from both companies compared to the year-earlier quarter. Visa, set to report fiscal third-quarter results late Wednesday, is expected to earn 64 cents a share, while MasterCard, slated to report early Thursday, is expected to earn $2.42 a share.

Visa and MasterCard make the bulk of their money from charging fees to financial institutions that issue the cards as well as to the firms that set up and service merchants that accept the networks. Chairman and CEO Joseph Saunders, in a press release late Monday announcing the departure of Visa's president John C. (Hans) Morris and other operation streamlining, said the company has "met or exceeded" most of the financial goals established during last year's IPO. The company "continue s to meet or exceed all our current financial guidance," Saunders said.

Great Expectations: Visa

Analysts say that both MasterCard and Visa are also able to meet earnings estimates by cutting expenses, specifically advertising and marketing expenses, which the companies consider variable -- not fixed -- expenses.

"Even with reduced consumer spending on credit cards, they are making money on the debit card side," says Adil Moussa, an industry analyst at consulting firm Aite Group. "It's really something that helped them kind of compensate from the lack of revenue that they were seeing from the credit card side. But we shouldn't really forget one of their largest sources ... they charge issuers and acquirers for different services and those are not going to change. And whether they have the volume or not these acquirers and issuers, they are still going to have to pay to Visa and MasterCard."

And in the last six months both Visa and MasterCard have increased certain fees they charge to financial institutions, according to Moussa.

"Besides the competition amongst themselves that the networks are going through and the recession, in which they have been almost bulletproof, I don't see anything that can really hamper their march," Moussa says, noting opportunities to capture electronic transactions in other big markets such as India and China.

Deutsche Bank analyst Christopher Mammone says in a note he expects "solid displays of earnings power" by both companies due to the "massive leverage inherent in the transaction-based models" and an ability to aggressively cut costs. He rates both companies with a buy.

Mammone acknowledges that declines in debit spending could be a risk for Visa, but recent data suggests that debit volumes "remained relatively stable" vs. the quarter ending in March, he writes. For MasterCard, Mammone expects an "outsized boost to revenue from pricing, as MasterCard enjoyed dual benefits of a new fee implemented in U.S. in mid-April and new fees in Europe introduced last October," he writes.

Visa will record a large gain in the quarter due to the sale of shares in its Brazilian affiliate, which went public during the period. Visa's proceeds from the sale are approximately $1 billion, roughly half of which it will retain after taxes, it said. (The company will record a GAAP one-time gain from the sale of approximately $235 million after taxes.)

"Because Visa reports core volume-based revenue on a lag, we see little risk to fiscal third-quarter results," JPMorgan Chase analyst Tien-tsin Huang writes on Monday. "The focus will be on commentary on recent trends, where there is evidence of stability, given better than feared domestic bank data reported in the last several days."

JPMorgan's Huang also rates both Visa and MasterCard at overweight.

Huang also pointed to improved data on consumer spending trends. Still while the analyst is "confident" of purchase volume and transaction trends, Huang is less confident in cross-border spending trends.

In a separate note on MasterCard, the JPMorgan analyst said that while the quarter's results should be "good enough," it is "still too early to call for anything better than stabilization as near-term comps remain tough and the outlook on cross-border spending remains hazy."

Bob Napoli, an analyst at Piper Jaffray also has buy-equivalent ratings on Visa and MasterCard.

He points out that declining credit card sales volume growth at JPMorgan Chase and Bank of America, two large payments customers of Visa, was slightly less than expected, meaning that purchase volume from Visa's credit card business, while still expected to decline, may exceed his expectations.

On the other hand, MasterCard's U.S. credit purchase volume has been additionally impacted by Citi's continued struggles, one of its largest customers, he writes.

Both companies' revenue growth "will accelerate significantly" in the December quarter due to transaction fee price increases, higher gas prices, the "lapping" of foreign exchange trends, and continued signs of stabilizing consumer spending and bank card spending trends.

"Generally speaking, in this slow/no growth environment, we believe that top-line growth is worth more of a premium, and that investors will pay up for companies that can grow revenue," he writes in a note.

-- Reported by Laurie Kulikowski in New York.

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