Yahoo Finance Payment Processors Garner Premium Valuations among Financials
What's Kept Payment Processors Strong among Financials in 2016?
Valuations
Visa (V) is trading at 25.2x on a one-year forward earnings basis. Its peers are trading at 15.3x. Historically, Visa has traded at a premium to its peers because of its strong brand, zero leverage, higher growth, and strong operating margins.
The company has taken on a debt of ~$16 billion to fund its acquisition of Visa Europe. The company’s stand-alone valuation gap has increased marginally due to the relatively low performances of its competitors.
MasterCard (MA) is trading at 25.8x on a one-year forward earnings basis. Its peers are trading at an average of 18.4x. Historically, MasterCard has traded at a premium to its peers because of its strong brand, increasing partnerships, diversified earnings, higher growth, and operating margins.
The foreign exchange rate could continue to negatively impact MasterCard’s revenue growth in 2016. Client incentives are expected to be higher in the upcoming quarters. The company will focus more on payments through mobile phones and digital wearables.
American Express’s valuations
American Express’s (AXP) stock has fallen by 16% over the past year. The company is currently trading at a one-year forward price-to-earnings ratio of 12x compared to the industry average of 20.9x. The discount has widened over the past few quarters on higher expenditures toward services, marketing, and new partnerships.
American Express’s relatively low valuation, along with its increased spending on new partnerships and clients, should be reflected in its stock price going forward. The company is targeting cost savings of $1 billion by 2017, which should boost its operating margins.
Takeover bids can attract decent premiums on current prices. However, in the event of failed attempts or continued weak operating performances, we could very well see further falls in AXP’s stock price.
Discover Financial Services (DFS) is also trading at a low price-to-earnings multiple of 12x due to its higher leverage and lesser brand presence.
Payment processors (DIA) on the whole are valued at a premium compared to the Market and other financials due to their increased spending and higher operating margins.
In the next part of the series, let’s look at payment processors’ strategies for expansion and growth.
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