Here's Why Baird Analysts Like MasterCard Better Than Visa

Baird rates both Mastercard Inc (NYSE: MA) and Visa Inc (NYSE: V) Outperform and acknowledges both have a path to strong EPS growth with upside to estimates.

But, the brokerage prefers MasterCard over Visa for the below reasons.

Why MasterCard?

The brokerage prefers less sentiment-favored stocks. Visa Europe catalyst has been a big sentiment driver for Visa and may have overshadowed MasterCard's very strong core results in recent quarters.

On the valuation front, MasterCard is slightly cheaper than Visa.

"MA currently trades at 23X C2017E EPS and V at 24X C2017E EPS. While Visa likely has some estimate upside potential, we think MA may have more," analyst David Koning wrote in a note.

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The analyst noted that MasterCard has been growing revenue a little faster than Visa in recent years, mainly driven by MasterCard's faster growth in cross-border and other segments. MasterCard's recent core revenue growth of about 13–16 percent is above Visa's growth of about 8-13 percent.

In addition, Koning highlighted that MasterCard's margins are set to rise despite MA's current operating margins are in the mid-50s range, while Visa's are in the mid-60s.

"While there are reasons for MasterCard to have lower margins (acquiring lower margin businesses, smaller scale, etc.), we think margins could eventually get to 60 percent more easily than Visa's margins going to 70+ percent," the analyst continued.

Last, but not the least, MasterCard has a slightly cleaner balance sheet, while Visa is levered at about 1X TTM pro forma EBITDA.

The Bottom Line

Therefore, Koning reiterated its Outperform rating on MasterCard and raised his price target by $5 to $120 ahead of the company's investor day on September 7.

Among other highlights, the analyst expects the event to review 2016–2018 long-term guidance (low-double-digit organic constant-fx revenue growth, mid-teens organic constant-fx EPS growth).

"We like the stock, as we think estimates continue to be biased higher (toward $3.65+; consensus $3.61), and the investor day could be a catalyst for analysts to update models (six of last seven model updates had positive EPS estimate revisions)," Koning elaborated.

The analyst thinks core revenue could be a little better than guidance, as guidance implies a big slowdown in H2-16, which seems conservative. Further, the analyst believes forex is about 20–30bps better to revenue for third quarter, 2016 and 2017, when compared to the time of reporting second quarter earnings.

Koning expects EPS of $3.65/$4.28/$4.90 for 2016/17/18, respectively.

"We view MA as a very good year-out risk/reward (year-out risk/reward range $90–144, in our view)," Koning added.

At time of writing, MasterCard was up 0.85 percent to $98.72, while Visa was up 0.43 percent at $82.35.

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