The U.S. consumer has been in a funk for several years now.
European consumers feel even more pinched. Even the go-go economies
of China and Brazil are seeing the signs of weakening consumer
sentiment. Still,
credit card
giants
Visa (NYSE:
V
)
and
MasterCard (NYSE:
MA
)
have managed to whistle past the graveyard. They've seen their
shares
soar ever-higher, becoming a "must-own" stock for many
mutual funds
and
hedge
funds.
But if you've been on the winning end of the credit card trade,
then you need to get out --now. These stocks suddenly look tired
and their next move may be down, according to one
Wall Street
analyst. After digging through these company's fundamentals, I
think you'll be hearing about more downgrades in the coming weeks
and months.
"
We're not banks"
Perhaps the greatest attribute of these stocks is that they carry
almost none of the risk other financial-service providers bring.
They don't own stocks and
bonds
, they don't underwrite equity and
fixed-income
offerings, and they don't hold loans that might go into default.
Visa and MasterCard simply take a slice of every financial
transaction. And with the world slowly migrating to a "cash-free"
environment, these companies have been able to boost sales at a
10%-plus annual clip during the past eight years. In fact, they've
never had a down year in terms of revenue growth. And investors
have responded in kind.
As the charts below show, these credit card issuers have been
steadily rising in value, even as the broader
market
has gyrated up and down in the last six quarters.
These two firms now sport a collective $135 billion in
market value
, which is up more than 50% in the past year alone. Yet UBS Analyst
John Williams spots trouble ahead. He says the troubled global
economy
is about to negatively affect credit-card transaction volumes,
right at a time when these two firms' organic expansion plans have
maxed out. "Investors are not prepared or positioned for a slowdown
in the businesses," he says.
Part of his concern stems from U.S. consumer spending, which
accounts for 52% of Visa's revenue and 38% of Visa's. Recent
economic reports point to a fresh slowdown in consumer spending as
we head toward the all-important back-to-school season. In the
quarter ended March, Visa noted a 4% increase in year-over-year
transaction
volume
growth. By May, that figure had slipped to 2%. Don't be surprised
if it turns flat or negative this summer.
Payment-processing firm First Data, which tracks card usage on a
monthly basis, recently noted that transaction volume growth
slipped from May to June. "Stubbornly high unemployment and
economic anxiety took a toll on sales as consumers pulled back on
spending. Despite a sustained decline in fuel prices, consumers
have not translated those savings into spending elsewhere," the
company reported.
What are they worth?
To get a sense of how these stocks should be valued, you can look
at their projected
earnings
growth rates and their current price-to-earnings ratios. Both
stocks trade for around 16-17 times projected 2013 consensus
EPS
(earnings per share) estimates. (These forward multiples had been
in the 10-12 range before the stocks took off during the last six
quarters). Williams slightly lowered his 2013 EPS assumptions to
the point that each of these stocks now trades for around 15 times
his projected 2013 profits.
Trouble is, it's hard to square his very modest EPS reductions
with his assessment that growth is set to slow sharply. But that's
how Wall Street works. Analysts tend to trim forecasts only
modestly at first, and then proceed to make cut after cut. A
meta-analysis of this analyst's actions implies that he -- and his
peers -- will likely start to steadily trim their
profit
view for these stocks.
On July 9, Williams gave a "sell" rating on these stocks, and
his price targets represent only 5% downside. Yet price targets are
irrelevant. Instead, investors trade on trends, and in this case,
the trend looks to be off-putting. "We believe both
companies' exposure to a slowing consumer-spending backdrop makes a
slowdown in key metrics simply unavoidable." That's a reason to
sell for any major institution that has been loading up on this
stock. And it's that move to profit-taking that can take these
stocks well below Williams' price targets of $113 for Visa and $403
for MasterCard.
The credit card penalty
I've been thinking about these stocks recently for an entirely
different reason. In the past few weeks and months, a number of gas
stations in my area have started to charge 10 cents more per gallon
to use credit cards. As a result, I'm now paying for fill-ups with
cash. I wonder how many other consumers are doing the same. I've
also had a few other retailers
offer
me modest discounts if I pay in cash, as they too are balking at
high credit-card fees. This kind of action is just now showing up
in the broader card-usage data, as this
The Wall Street Journal
article
describes. We may be hearing more and more about this in
coming months.
Risks to Consider:
As an upside risk, both of these firms are set to go to trial
in September in response to charges that they conspired to raise
fees for merchants in a collusive manner. Investors are currently
anticipating $7 billion to $10 billion in damages and near-term
caps on the fees they can charge, but a more favorable settlement
could boost these stocks temporarily.
Action to Take -->
It's a bit early to see these stocks as solid short candidates.
They appear to have decent -- albeit not significant -- downside.
In this vulnerable market, however, investors should see stocks
such as these, which have posted major gains and appear to be at
risk of falling EPS estimates, as great candidates for
profit-taking.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of MA, V in one or more if its "real money" portfolios.