Visa Inc. (NYSE:V) shares are up more than 5.10% this year and recently increased 0.72% or $0.86 to settle at $119.84. Mastercard Incorporated (NYSE:MA), on the other hand, is up 6.32% year to date as of 01/11/2018. It currently trades at $160.92 and has returned 3.28% during the past week.
Visa Inc. (NYSE:V) and Mastercard Incorporated (NYSE:MA) are the two most active stocks in the Credit Services industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect V to grow earnings at a 17.19% annual rate over the next 5 years. Comparatively, MA is expected to grow at a 18.80% annual rate. All else equal, MA’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 57.37% for Mastercard Incorporated (MA). V’s ROI is 15.70% while MA has a ROI of 38.50%. The interpretation is that MA’s business generates a higher return on investment than V’s.
The value of a stock is simply the present value of its future free cash flows. V’s free cash flow (“FCF”) per share for the trailing twelve months was +0.92. Comparatively, MA’s free cash flow per share was +1.33. On a percent-of-sales basis, V’s free cash flow was 10.38% while MA converted 13.06% of its revenues into cash flow. This means that, for a given level of sales, MA is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. V has a current ratio of 1.90 compared to 1.70 for MA. This means that V can more easily cover its most immediate liabilities over the next twelve months. V’s debt-to-equity ratio is 0.67 versus a D/E of 0.84 for MA. MA is therefore the more solvent of the two companies, and has lower financial risk.
V trades at a forward P/E of 25.03, a P/B of 9.99, and a P/S of 14.45, compared to a forward P/E of 29.72, a P/B of 26.55, and a P/S of 13.98 for MA. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. V is currently priced at a -4.62% to its one-year price target of 125.65. Comparatively, MA is -2.71% relative to its price target of 165.41. This suggests that V is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.80 for V and 1.80 for MA, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. V has a beta of 0.98 and MA’s beta is 1.22. V’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.V has a short ratio of 4.46 compared to a short interest of 2.26 for MA. This implies that the market is currently less bearish on the outlook for MA.
Visa Inc. (NYSE:V) beats Mastercard Incorporated (NYSE:MA) on a total of 7 of the 14 factors compared between the two stocks. V is more profitable, higher liquidity and has lower financial risk. In terms of valuation, V is the cheaper of the two stocks on an earnings and book value, V is more undervalued relative to its price target.