(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of V and MA.)
Shares of fintech giants Visa Inc. (V) and MasterCard Inc. (MA) have increased by 39% and 56% respectively over the past year, crushing the S&P 500's rise of just 15.5%. If you thought the two payment processors at the heart of the e-commerce ecosystem were finished rising, think again. Analysts are looking for shares of both companies to increase by 1%. A better outlook for both companies is driving the bullish sentiment.
Visa crushed analysts' earnings estimates by nearly 10% when it reported fiscal fourth-quarter results at the end of July with revenue that topped forecasts by approximately 3%. MasterCard did the same, with earnings beating estimates by nearly 9%, while revenue came in-line. As a result, analysts have not only raised their price targets but are upping their profit outlooks for the coming years.
Analysts now have an average price target on Visa of $157.50, 12% higher than the current stock price of approximately $140.70. Meanwhile, MasterCard is seen rising by about 12% to an average price target of $226 from its current price of about $203. Over the past month, both price targets have increased by roughly 8%.
V data by YCharts
The reason for the optimism is the stronger growth outlook. Over the past month, analysts have taken their earnings outlook for MasterCard higher, by nearly 2% for 2019 and 3% for 2020. MasterCard's earnings are now forecast to climb by 40% in 2018 and about 17% in 2019 and 2020. The outlook for Visa has improved as well, with earnings in 2019 climbing by 1% and 2% in 2020. Visa is expected to now grow earnings at roughly 32% in 2018, and about 16% for the next two years.
Strong Sales Growth
Revenue estimates have also climbed, but to a far lesser extent, with Visa's revenue outlook rising by about 1% for each of the next two years, while MasterCard's forecasts are flat to up 1%. But overall year-over-year growth rates are expected to be strong, with revenue for MasterCard expected to rise by about 12% for the next two years, while Visa is seen increasing by roughly 11%.
Neither company is a bargain, with MasterCard trading at 27 times 2019 earnings estimates and Visa trading at 26 times 2019 estimates. But if the two companies can continue to grow profits at faster-than-expected paces, those earnings multiples over time may fall as estimates rise, and that likely means the stock prices can continue to climb.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. 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 recommendations made during the past twelve months. Past performance is not indicative of future performance.