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2 Warren Buffett Credit Card Stocks to Buy and Hold Forever

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According to Allied Market Research, the global credit card payments market is projected to reach $263.4 billion by 2028, growing at a CAGR of 8.5%. Increasing demand for cash alternatives and diversification in product offerings are set to be the key drivers for this market’s growth.

Warren Buffett is heavily invested in this market. Buffett is widely known as one of the greatest stock market investors of all time. His investment firm, Berkshire Hathaway (BRK.B), has demonstrated outstanding returns over the past half-century, becoming a household name in the process. 

The two credit card stocks Buffett owns are Visa Inc. (V) and Mastercard Inc. (MA). Today I’ll analyze these two companies to illustrate why investors should follow Buffett’s lead.

Visa Inc.

Founded in 1958, Visa is an American financial services corporation that operates as a retail electronic payment network across over 200 countries. The company facilitates electronic funds transfers, most commonly through Visa-branded credit cards, debit cards and prepaid cards.

Since the beginning of the year, shares of the payment giant have climbed around 4.5%, underperforming the S&P 500. 

Recent Developments

On October 8th, the company announced that it had expanded its Buy Now, Pay Later (BNPL) payment option, known as Visa Installments, to Australia. Visa partnered up with ANZ and Quest Payment Systems to enter the Australian BNPL market. Because of this collaboration, Australian shoppers can seamlessly access Visa’s BNPL option via its existing ANZ banking app. Management said that “overwhelming demand” for the BNPL program currently exists in Australia. 

Fundamental Overview

In terms of financials, the company’s total revenue for its second quarter, which ended June 30th, 2021, rose 26.7% year-over-year to $6.13 billion. This increase was mainly driven by the growth in nominal payments volume, processed transactions, and nominal cross-border volume. Notably, payments volume and processed transactions increased year-over-year by 34% in constant dollars and 39% as of 3Q2021, respectively. As a result, Visa was able to beat the Wall Street revenue consensus by $270 million. The company reported a Non-GAAP EPS of $1.49, beating analysts’ consensus by $0.14.

Also, the company currently pays a quarterly dividend of $0.32, translating into a forward dividend yield of 0.56%.

For the next quarter, analysts established a consensus EPS estimate of $1.54 for Visa, representing a 37.16% increase compared to the year-ago figure of $1.12. The $6.52 billion average revenue estimate for the fourth quarter implies a 27.90% growth year-over-year.  

However, Visa’s valuation multiples look expensive compared to the sector’s median levels. For instance, the stock currently trades with a forward P/E of 39.52x and forward EV/EBITDA of 29.50x. These values come in well above the sector’s median of 24.45x and 15.37x, respectively. 

Wall Street analysts have rated Visa as a “Strong Buy” with an average price target of $280.74, representing an upside opportunity of 22% from the stock’s current level.

Mastercard Incorporated

Headquartered in Purchase, New York, Mastercard Inc. is a financial services technology company that offers transaction processing and other payment-related products and services across the globe.

Year-to-Date (YTD), MA stock is down about 1.3%, underperforming the broader market. However, this underperformance could create a solid entry point for long-term investors, allowing them to pick up this high-quality stock at a discount.

Recent Developments

On September 28th, Mastercard introduced its own version of a Buy Now, Pay Later program, Mastercard Installments. The company said that Mastercard Installments would be available for in-store and web purchases in the United States, Australia, and the U.K.

Financial Overview

On July 29th, Mastercard reported earnings for the second quarter of 2021. In Q2, total revenue has risen 36.4% year-over-year to $4.5 billion.  Second-quarter gross dollar volume increased 33% year-over-year on a local currency basis, while cross-border volume climbed 58% on a local currency basis. Moreover, the company’s revenue figure came well above Wall Street estimates, beating it by $1.5 billion. Besides, MA reported a Non-GAAP EPS of $1.95, beating Wall Street expectations by $0.20.

The stock’s current annualized dividend rate is $1.76 per share, which translates to a dividend yield of 0.50% as of October 10th. On September 20th, Mastercard had declared a $0.44 quarterly dividend, payable on November 9th.

Analysts’ Estimates & Valuation 

Currently, Wall Street expects MA’s earnings to grow 36.72% in 3Q2021 to $2.19 per share. Following this trend, analysts forecast that its third-quarter revenue could jump to $4.95 billion. This estimate shows a rise of about 29% on a year-over-year basis. Analysts expect MA revenues to lift by 23.20% to $18.84 billion in 2021.

When it comes to valuation, the stock looks overvalued like its peer Visa. Mastercard’s forward P/E of 43.65x is 78.51% higher than the sector’s median of 24.45x. Also, the company’s forward P/S and EV/EBITDA multiples stand at 18.58x and 32.90x versus the sector’s median of 3.93x and 15.37x, respectively.

Analysts have established a “Strong Buy” rating for MA, with an average price target of $439.94, an upside opportunity of 24% from current levels.

Oleksandr Pylypenko

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.

Oleksandr focuses his trade strategy around “special situations” (such as catalysts, potential acquisitions, or spin-offs) and how to make money from those catalysts, as direct stock purchases, combined with option-based approaches for risk minimization.

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