How much cash do you have in your pocket right now? I've got $7, all singles. Fifteen years ago, this would have been a major problem. Sure there were debit cards and credit cards, but let's face it, not every store took debit and credit cards. Now you can walk into a Dunkin Donuts and charge a $2 coffee. The world has changed, and even street vendors take cards. Why even carry cash?
Cashless Winners: Visa & Mastercard
Visa (V) and Mastercard (MA) are two great ways to play the continued transition to a cashless society. Why not American Express (AXP)? Keep in mind that Visa and Mastercard are payments processors. A bank issues credit cards, holds the debt and charges a rate of interest. Visa and Mastercard simply handle the transaction at the point of sale and collect fees on each transaction. On the other hand, American Express issues cards, sets the rates and holds the debt. AXP isn't a terrible choice for exposure to payments, but Visa and Mastercard are the clean way to play increasing payments transaction volumes without having to worry about default rates and the like.
Research shows that card payment volumes continue to grow strongly. In September 2016, Euromonitor International reported that consumer card payments had surpassed cash payments for the first time. The report showed $23.1 trillion was spent globally via card payments. The article went on to claim that in the 2016-2021 period, card payments would show a compounded annual growth rate (CAGR) of 6.6 percent and mobile payments would see a 23 percent CAGR. It predicted cash would only grow at a 1.3 percent CAGR over the same period.
Meanwhile, fewer and fewer people are using cash. A recent Ipsos/ING survey found that 34 percent of respondents in Europe and 38 percent of respondents in the US said they would be willing to go completely cash free. Meanwhile, 21 percent in Europe and 34 percent in the U.S. said they rarely use cash now. The story also noted that more than half of Europeans were using cash less often over the past 12 months.
Shares of Visa and Mastercard have seen robust gains over the past five years, with Visa up nearly 208 percent and Mastercard up nearly 170 percent as this trend to a cashless society picks up steam.
Analysts are expecting Visa to grow revenue to nearly $19.54 billion over the next two years, and earning to $4.50 per share. Meanwhile, analysts are looking for Mastercard to grow its revenue to $13.1 billion and earn $5.79 per share over the same period.
Visa had total revenue in 2016 of $15 billion, and Mastercard had total revenue of nearly $11 billion. These numbers would imply that expectations are for Visa to grow its top-line revenue at a rate of almost 30 percent over the next two years, while MA is expected to increase revenue close to 20 percent.
Analysts are looking for MA to have EPS of $5.79 in 2019, which would imply a two-year forward P/E of about 20, based on a share price of $112.75. Meanwhile, Visa is expected to have EPS of about 4.50, which would imply a two-year forward P/E of 20, based on the current stock price of $90.
With continued growth seen in on-line purchases, mobile purchases, and debit and card credit acceptance, Visa and Mastercard both seem well positioned to thrive in the years ahead. It would appear the desire to carry less cash will also benefit Visa and Mastercard in the longer term as well.
Michael Kramer and the clients of Mott Capital Management, LLC own shares of V and MA. Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.