Investments in Payment Solutions: Making Profit on Major Credit Card Companies

Standardized analysis methods do not work for all companies, especially when discussing the financial sector. Financial institutions differ in their essence and specificity from companies that produce goods and services in the regular sense. Therefore, our methodology does not cover insurance companies and banks with analysis. However, companies in the consumer financial industry have been among our favorites since the Eyestock rating appeared.

Today we’ll dive into the details and understand credit card stocks. Is it worth investing in Mastercard stock? Why does Warren Buffett buy American Express shares rather than take a long position in Visa stocks?

American Express (XNYS: AXP) is the third holding of Berkshire’s portfolio with an 8.6% share of capital. Warren Buffett commented on AXP stocks in his letter, and we analyzed it in detail in the Annual letter to shareholders transcript. We also reviewed and analyzed a Guru’s positions and whole portfolio strategy in our materials. Berkshire made the right «bet», as history has shown.

After all, AXP shares have outperformed Visa (NYSE: V) and Mastercard (NYSE: MA) over five years, and this is without taking into account the higher dividend yield. However, based on our scoring system, AXP is not the best business to invest in.

The debt-laden business, which is less stable in terms of net earnings per share, lags behind the other two companies in our point of view. Eyestock’s final rating of 51% for Amercian Express suggests it’s a fairly risky investment. If the APX stock were trading relatively low, there would be something to discuss, but its current value is 18% higher than the average P/E ratio estimate, so we prefer to stay out. Sufficiently high return volatility and beta above 1 serve as additional risk factors for investments.

Therefore, let’s take a closer look at our favorites in this segment: Visa and Mastercard. In fact, these companies seem almost like twin brothers. Both companies have a high rating on the Eyestock scale and are viable investments for us.

Receiving the majority of its revenue from international operations and having a similar business model and revenue structure, Visa, with annual revenues of $32.6B and a market cap of $556.4B, remains a slightly larger size business than Mastercard, with corresponding results of $25.1B and $442B. Most of the financials are very similar. However, there is an important difference. This is an approach to asset formation and borrowing policy.

Let us look at the equity multiplier or financial leverage ratio for both companies. Financial leverage is a multiplier that shows how much of a company’s assets are financed by debts and other liabilities assumed. The higher the value of this indicator, the more often the company resorts to borrowing to purchase new assets.

While Visa management forms business assets based on a fairly moderate proportion of $1 of equity and $2 of borrowed funds, Mastercard management acts extremely aggressively with an equity multiplier of 6.6! This difference in the business approaches of the two companies forms a discrepancy in the final score. Through aggressive borrowing, Mastercard shows a higher return on equity and operating efficiency but performs worse when assessing solvency, liquidity and financial strength.

As for these companies’ valuation, their average P/E ratio for the last 20 quarters is at the level of 34-38, and now as of April 4, MA stock is trading 5% higher average valuation, while Visa share is practically at its Moderate Risk Entry Point, which in our opinion creates a good opportunity to start investing in an outstanding company at a fair price!

Also, as an alternative, investors may consider PayPal shares. The company has an Eyestock rating of 69%, which refers to a moderate one and the status of a somewhat risky investment. With a probability of 80%, the rating will remain moderate by our scale in the next period, based on the AI model, which helps us build an assessment of the future period. However, PYPL stock is undervalued by Eyestock methodology and as of April 4 is trading at only 17 price-to-earnings ratios which is too close to its historical minimum.

Invest Smart, Grow Fast with Eyestock’s Ratings and Valuations