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Visa and Mastercard do not see inflation cutting into consumer spending.
The two credit card issuers reported solid fourth-quarter revenues and earnings thanks to a strong rebound in overseas traveling and eCommerce. Visa’s overseas revenue increased by 50%, while Mastercard’s rose by 44%.
“In the fiscal fourth quarter, we saw a continuation of many of the spending trends present throughout 2022: strength in consumer payments, resilience in eCommerce and ongoing recovery in cross-border travel,” said Visa CEO Alfred Kelly Jr.
“These trends contributed to robust full-year 2022 results, with net revenues, net income and EPS all up more than 20% year-over-year, despite broader macroeconomic uncertainty and geopolitical turmoil.”
Mastercard CEO Michael Miebach said that “consumer spending remains resilient and cross-border travel continues to recover.” He added that the company “delivered strong revenue and earnings growth again this quarter, reflecting the focused execution of our strategy.”
Visa and Mastercard’s results have come as a surprise to some industry analysts, given the challenging macroeconomic environment they operate.
“Visa reported a jump in quarterly profit in its latest quarter, helped by consumer spending, which is surprising given the expected slowdown due to surging inflation,” Sam Boughedda, a stock market writer at AskTraders, told International Business Times in an email.
Kunal Sawhney, CEO of Kalkine Group, thinks that inflation is a positive for Visa, as a decline in real earnings prompted people to use more credit.
“High inflation could have led to people spending more through credit cards, maybe because earnings are unable to match the presently high prices of goods and services including even essentials,” Sawhney told IBT.
Logan Purk, a senior research analyst at Research Edward Jones, said that Visa and Mastercard are not immune to inflation pressures.
These pressures are limited for a couple of reasons. One of them is that the two credit issuers have no raw material costs. The other is that they don’t have direct labor costs. Thus, the “second line,” the cost of goods is close to zero.
What they have is administrative and marketing costs.
“Visa is facing inflation pressures largely through its Personnel line item,” said Logan. “This cost was up 27.2% year-on-year.”
And though that may sound like a big number, it doesn’t have a significant effect on the already hefty margins of the company.
Visa and Mastercard operate almost like a duopoly, thanks to the economies of networking, which keeps competition off their home turf. And that allows the two companies to allocate capital effectively, delivering superior returns to capital holders.
According to GuruFocus, Visa’s Economic Value Added (EVA), a measure of the excess return companies create for capital holders, is 16.5%, while Mastercard’s is 33%.
EVA has stayed in double digits over the last decade, re-enforcing the view that the two companies have strong “moats” to defend their competitive advantage.
Disclosure: The author owns shares of Visa and Mastercard.
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