In this week's installment of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, dive into the latest results from Visa (NYSE:V) and Mastercard (NYSE:MA), both of which saw earnings decline sharply despite strong payment volume. Plus, Square (NYSE:SQ) is reportedly trying to make a move into the tax preparation business, and two mall REITs just filed for bankruptcy as the pandemic continues. And finally, hear why Matt is keeping a close eye on Berkshire Hathaway (NYSE:BRK.A) this week, while Moser is watching Bill.com (NYSE:BILL).

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This video was recorded on Nov. 2, 2020.

Jason Moser: It's Monday, November 2nd. I'm your host Jason Moser. On this week's Financial show, we've got a couple of big earnings reports to dive into, we're going to talk a little bit more about, eh, some headwinds maybe that are forming in the REIT space. It looks like Square may be making another acquisition here soon; we'll talk a little bit about that. Of course, we'll have one to watch for you for the coming week, a couple of stock ideas from me and Matt.

And speaking of Matt, Matt Frankel, I've got you back in the house here. You took a week off last week, a much-deserved break. But Certified Financial Planner Matt Frankel, thanks for being here.

Matt Frankel: Hey, it's good to be back, it's always good to take a little break and, you know, stretch the legs and stuff. I went up to the mountains with the family. I took my 2- and 4-year-old on a big hike up a mountain, which was really interesting. But we had fun. It was the highest point in the Blue Ridge Mountains, and you can only drive up so far and then there's like another 300 feet, 400 feet you can hike vertically almost. And my 2-year-old is a climber, so he did great.

Moser: Oh, that's terrific. Yeah, at that age, you never know, they get tired so quickly, it's always a bit of a gamble. [laughs]

Frankel: Yeah, I only had to carry him a little bit. [laughs]

Moser: Well, you know, they get heavy after a while, [laughs] even at 2-years-old. Well, I'm glad you had a good time, and I'm glad we got you back in the saddle here. Let's go ahead and jump right in, and let's talk a little bit about some of these earnings reports that came out last week. We have the two big payments providers there, and Visa and MasterCard reported in the middle of last week. And very similar reports, Matt, the market seemed to receive them kind of the same way as well. I mean, it wasn't a great week for either stock, and they've done a good job treading water here this year given everything that's been going on. But I think, in at least my perspective, and looking through these reports and going through the calls, it seemed like there was plenty of optimism in there. And so, let's go ahead and start with Visa at least, and talk about how they're viewing things here.

The quarter itself, topline revenue was down. It looked like about 17%, fell a little bit more than $5.1 billion net revenue, they're down a little bit for some obvious reasons. But it was interesting to me the language they've used in the call when they talk about this U-shaped versus V-shaped recovery and whatnot. And they're seeing this playing out a little bit differently, whether it's domestic or whether it's cross-border, right? They've talked about seeing more of a V-shaped recovery for domestic payment volumes, but when we get into the cross-border market where these companies are making lots of investments, they're still really witnessing more of an L-shaped recovery, and that has to do for, obviously, borders that are being locked down now, and there's just less travel going on. But what stood out to you in the quarter for Visa?

Frankel: Well, you actually just hinted at one of the big things that stood out is cross-border payments. You mentioned revenue down -- revenue fell 70% year-over-year, but interestingly enough, total payment volume for the quarter rose by 4% in Visa's network. So, it may sound kind of weird, like, don't they make their percentage of transactions and that's where they get their money, which, yes, that's the case, but the biggest fees come from cross-border transfers. If you have a credit card, it probably charges a foreign transaction fee, for example. So, this is one way that they make their money, and those, in Visa's case, excluding money transfers that just happened within European countries, excluding that, cross-border transfers were down 41% year-over-year. Not surprising, because there's no cross-border movement [laughs] going on. I mean, no one is crossing borders. So, there are fewer reasons to send money across-borders. So, that's one of the big trends that really stood out to me, that's why revenue was down.

Interesting and worth pointing out, Visa is still very profitable. Earnings were down 23%, but another way to say that is they're still making more than three-quarters of their previous profit. So, take it with a big grain of salt.

The other big thing that stood out is the mix of payment volume. I mentioned Visa's payment volume was up 4% year-over-year. Debit card payment volumes were up 20% year-over-year. Credit card payment volumes were down 10% year-over-year. So, people are more hesitant to put money on their credit cards it seems, as opposed to debit cards, and debit cards have much lower interchange fees, it's worth pointing out.

Moser: Yeah, and that debit versus credit, obviously, that's a function of one essentially being pulled directly out of an account versus another where you're not necessarily paying for it all at once. Let's talk for a minute about Visa's acquisition strategy, because there are a couple of things that stood out here to me, and I wanted to get your take on both of them here. One, we're seeing that Visa is acquiring this company called YellowPepper. And it's a company that they've partnered with for a while now. So, the acquisition, I mean, you typically don't get lots of information regarding the terms of the deal and whatnot, so this could be just another little, sort of, bolt-on acquisition, perhaps.

But I think the bigger one really is the status of the Plaid deal; we've talked a little bit about this Plaid acquisition. It seems like, at least, that the DoJ is giving it a closer look.

Frankel: Yeah. And this is to be expected. Right now, we're seeing M&A activity heat up all over the financial services space. We've talked about this. A lot of it's the function of consumers wanting lower fees; the big gradual trend is toward zero fees, and that's one big reason you're seeing so much consolidation. We've talked about this in the context of the brokerage business where commissions have gone away. The way you make your money is to be more efficient than the other guy. [laughs] And the way you get more efficient is to acquire things.

In the credit card space, with Visa you're seeing a lot of acquisitions intended to prevent them from being disrupted, I guess you'd say, which is, I think, where the Plaid thing comes in, and especially, the YellowPepper, which we'll talk about in just a second. But in terms of the Plaid acquisition, when you have something like this, you're always going to see the DoJ investigate when you have a deal of this size that could potentially be a needle-mover. I mean, the fact that they're investigating, it really shows you the value that this could add to Visa's business, in my opinion.

Moser: Yeah. And it strikes me too that this, at least the Plaid acquisition, doesn't seem like an acquisition that is based on eliminating a potential competitor. And looking back at Facebook and Instagram, it's become clear, based essentially on language that was used at the time when the deal was presented, that Facebook was looking at that acquisition as really kind of eliminating a potential competitor. It was partly about making Facebook a stronger business, but it was also very much in part eliminating a potential competitor there. And so, in hindsight, they probably should have kept that under the microscope more. I don't think that's really what's going on with the Plaid deal, but it has the potential to certainly make it a much stronger business.

And I don't know what your thoughts were on the YellowPepper acquisition; that's a big presence in Latin America, isn't it?

Frankel: I mean, that's an obvious move to kind of increase the international presence. The big growth potential for both Visa and MasterCard is internationally. We're used to both of them being almost universally accepted in the U.S., especially in the past few years. Ever since companies like Square and PayPal made credit card acceptance so easy it's pretty much universal here, that's not the case in a lot of markets, especially Latin America. So, it's not surprising to see Visa, kind of, invest a lot of money to get into more of the inner workings of the fintech markets in Latin America.

I like the deal, I want to see the price; I'm pretty sure that one was an undisclosed price, or at least I couldn't find one. [laughs] These acquisitions are going for a lot more money than I would have thought, like, I would never have thought PayPal was going to pay almost $4 billion for Honey or whatever it was, or that Visa was going to pay $5.3 billion for Plaid. So, I want to see what the price of the deal is, [laughs] before I say whether it's a good move or not. Because sometimes in this market, I feel like I'm the only person in the world who still thinks that price matters.

Moser: Well, you're not the only person that feels that way, I definitely feel that way. To me, listen, price always matters. And I don't think I'll ever get past that. Now, there are different ways to view that, and certainly valuation is something that you want to look at in relation to the company's growth prospects, but I absolutely do believe that price matters. And it does feel like right now nobody out there really cares about it. [laughs]

Frankel: And here's the million-dollar question, is Plaid worth $5.3 billion as a stand-alone business? Absolutely not. The question is, will it add that much value or more to Visa's business?

Moser: Yeah. Well, and that said, Visa has got something like, I don't know, what, $4 billion cards out there now or something. So, I mean, you're plugging it into, obviously, the biggest payments network, and that is something that they can factor in. That price becomes a little bit more justifiable, I think, to them at least, because they're viewing it from the size of the network, but regardless, it is a matter of you still got to do something with it.

Frankel: And if you remember when the Plaid deal was announced, Visa stock went down. And my big theory on why is, because of the price of the deal, not necessarily because of the deal itself, it's because they're spending over $5 billion of their capital as opposed to putting it to use with buybacks or dividends or something like that. So, that's a big chunk of change for -- and it's really unclear what Visa is going to do with Plaid.

Moser: Yeah, it is unclear. [laughs] The payments space is a very tricky one to fully connect all the dots. Well, let's move over to MasterCard here, because that was a similar-looking report and a similar, I think, sound on the call where the optimism was, obviously, still there, even though the numbers are challenged in some areas. But MasterCard, net revenue down 14% for the quarter, dealing with a lot of the same challenges that Visa is dealing with in regard to cross-border and global. But what stood out to you in regard to MasterCard's quarter?

Frankel: Well, first of all, these earnings calls -- like, we could just play the Visa numbers again, those are that similar. But MasterCard, you know, slightly better in terms of revenue. Revenue was down 14%. My theory is, that's just because Visa is more of the debit card king in the United States, and debit cards have lower interchange fees and they're seeing more debit card activity. Cross-border volume was down even worse than Visa, it is down 48% year-over-year. Their earnings suffered as a result, down 26%.

And both Visa and MasterCard released the consumer spending trends into October by week-by-week. And we're seeing, through October, everything staying pretty steady, cross-border is inching up, overall payment volume is inching up, but we're not seeing a giant recovery heading into the holiday season, if that's what people were looking for at this point. The fourth quarter is going to be key, because on one hand the virus cases are spiking and people are worried that they're going to be locked down and stuff like that. On the other hand, it's holiday shopping season and there's a lot of pent-up consumer demand, a lot of people have been saving money all year.

So, it'll be really interesting to see how the next quarter plays out for both of these. But as far as the numbers, it wasn't too surprising. I actually thought cross-border would be down a lot more than 48%, just based on how locked down everybody's borders are these days, so. And, you know, MasterCard 4% overall volume growth in the U.S. was exactly the same as Visa's. So, [laughs] these numbers just show just what similar businesses these two are.

Moser: Yeah. And I think to your point there about feeling like maybe the numbers could have been worse given the state of things. I think part of that is due to the way the consumer actually feels about this right now. I noticed in MasterCard's call, they pointed out some of their own internal research talking about the shift toward electronic payments. And they noted in the call that essentially seven in 10 people globally say that this shift toward electronic payments and more e-commerce-like business being done will likely be permanent. And then also that their researcher showed that about 60% of consumers plan to use less cash, even after the pandemic is besides.

I mean, on the one hand, I kind of feel like, yeah, that makes perfect sense; and on the other hand, I kind of thought, man! You know what, it seems like those numbers should be higher, but maybe we're still a bit earlier on. I think regardless, whatever, it does show you the state of the consumer, where the consumer's head is at, at this point. And that definitely is going to play something to these businesses favor longer down the line. I mean, I think that is, sort of, that's a good long-term trend that you like to see that these businesses are focused on capitalizing on, and I think they'll continue to do that.

Frankel: Yeah. If I put a one-sentence takeaway is that consumers are spending money, but within their home countries. If Visa and MasterCard are not going to set new earnings records for each company until cross-border returns, which I don't see happening till mid-next year at the earliest.

Moser: Yeah, that's still got some time. Well, let's move over to one of your specialties, Real Estate Investment Trusts, REITs. You know, we love talking about these companies, because they are typically very high yielding investments, they have to pay out a lot of their income there in dividends in order to maintain that REIT and tax advantaged status. But we saw news today there are two more mall owners, and CBL, and Pennsylvania Real Estate Investment Trust, these are smaller REITs, to be fair, but they have filed for Chapter 11 bankruptcy protection. And when I saw this headline this morning, I immediately thought of you, because you know the space so well.

And you know, on the one hand I thought, well, they're small, I don't know that it's all that big of a deal, but you know, on the other hand I'm thinking, is this a sign of continued trouble ahead of one's problems, and investors should be aware of?

Frankel: Well, first off, these aren't necessarily small companies, these are companies that have become penny stocks over the past few years, they didn't start out that way.

Moser: Right. [laughs] They earned their way to smallness, I guess.

Frankel: They own a lot of malls, so in that sense they're actually pretty large companies. Pennsylvania Real Estate Trust owns the mall I used to shop at as a kid that's still in New Jersey, the Cherry Hill Mall, if anybody knows where that is.

Both of these filed Chapter 11 today. It's really rare for a Real Estate Investment Trust to have to file bankruptcy, it's very, very rare; I can't tell you the last one that did it. It was just a matter of time for these two, though. These were kind of inevitable, especially in CBL's case, their debt is just, kind of, spiraling out of control, uncollected rent, a lot of big mall tenants have gone bankrupt this year. Ascena Brands, which is the parent company of Ann Taylor, Loft, and a few other brands; Tailored Brands, which is Men's Wearhouse, in JoS. A. Bank. And J.C. Penney, which is a giant anchor, especially for these two companies, have all gone bankrupt. So, in CBL's case, the debt was unsustainable before all those went bankrupt.

And just to kind of put this in perspective, this was a $0.17 stock before this happened. [laughs] So, you know, it was pretty much already priced in, I don't even think the bankruptcy really moved the needle all that much.

In the case of Pennsylvania Real Estate Trust, this was a planned, what they call, a prepackaged bankruptcy and there's $150 million in recapitalization financing ready and waiting, they're expecting to emerge pretty quickly. But for existing common stockholders, it's not very good news. The one thing to keep in mind is that these are -- not only are they not what they call the Class A. malls, these are the regional malls, the ones that have been struggling for years. The companies don't have a lot of liquidity, which is, you know, the word of the day in 2020. The REITs that have liquidity are doing well, the ones that don't, are not.

Don't worry about the Class A. mall operators just because of this. Like, Simon Property Group, I'm not planning to sell anytime soon. They have over $8 billion in liquidity, a very manageable debt load, and they have the capital available to reposition their properties when a tenant goes bankrupt. Simon just bought J.C. Penney actually, [laughs] come to think of it ...

Moser: That's right. I remember we talked about that.

Frankel: Right. So, they own the operating business now. So, they bought a few of -- J. Crew, they recently bought, they recently bought Lucky Brand. So, Simon has the money to do that. So, I wouldn't worry too much about the high-end mall operators, because not only are they buying up these retailers left-and-right, but they have the capital to reposition their properties to adapt to the new retail environment. Say, OK, you don't want a big department store, fine, we're going to put a concert venue where that was. Companies like CBL and Pennsylvania Real Estate Trust don't have the money to do that.

So, it's not really an apples-to-apples comparison. Like I said, the writing was on the wall for a long time. Their malls are going to stay open. Both of them are continuing operations while bankruptcy proceedings are going on. In Pennsylvania Real Estate Investment Trust's case, it's expected to emerge fairly quickly. But this just, kind of, really underscores that quality matters more than ever right now, especially in the troubled sectors, like retail, hotels, things like that. The troubled sectors of real estate quality is the most important thing to look at when you're evaluating a stock.

Moser: Yeah, I'm glad you said that, I'm glad you said that regarding quality, because going back to just what we were talking about a minute ago in regard to valuations and price matters, when we see these types of valuations that we're seeing with a lot of these businesses today, I mean, some of them are going to end up being great ideas, some of them are going to be really successful and some are not.

Just really focus on the quality of the business. When you start getting to these lofty valuations and you feel like that's a little bit of a concern, just make sure to give that quality a little bit of an extra weighting when you're considering businesses to add to your portfolio, because it really can help you sleep at night, I can tell you that for.

Frankel: For sure. And it's always important to focus on quality when you're talking about real estate, but especially in tough times like this when it's really just uncertain and companies need to have capital available to weather the storm.

Moser: Well, let's talk a little bit about another one of our favorite businesses here, Square. And we saw last week that there's this potential at least where Credit Karma is in talks to sell its tax preparation business to Square. And I think that part of this was a deal in order to avoid any antitrust concerns with another dynamic of this deal that doesn't involve Square, but you know, I don't know, we were talking about this morning, I don't know if you had a chance to read through, there was an article this weekend on the Wall Street Journal that talked about Jack Dorsey, who's the CEO of Square and Twitter, and talked at length about his management style. And particularly, he's got a very hands-off management style, which seems to be totally plausible given that he's running two major multi-billion-dollar corporations. But it does sound like there's the potential where, you know, maybe he's a little bit too hands-off in some cases. And I think we could argue that Twitter is maybe not benefiting from close enough eyes on what's going on there.

At what point -- I mean, with Square, it seems like they're going in a lot of different directions, and I'm not going to say I'm concerned with this at all, but is there a point, should we at least start becoming a little bit concerned with Square appearing to spread itself too thin?

Frankel: Well, first off, I'm not concerned with Dorsey's management style at Twitter, because I don't own that stock. So, selfishly, I don't really care.

Moser: Neither do I, that makes us two of us.

Frankel: No. And in all seriousness, I think Square is the higher potential business of the two, so I think that's where his efforts should be focused. But Dorsey's management style reminds me a lot of Warren Buffett's. And hear me out here, Warren Buffett has said, what we try to do is find the 400 hitters and then not teach them how to swing. And that's kind of what Dorsey does. He hires a rock star CFO; you know, he had Sarah Friar. Square's current CFO is doing phenomenal in her role. So, he tends to subscribe to that Warren Buffett mindset of, I'm going to find the best people possible and then not tell them how to do their jobs. Which is a great management style. [laughs]

So, if you're not familiar, Credit Karma, which we never get a chance to talk about, because technically, they're one of our competitors in a lot of ways and we don't really, you know, talk about our competitors that much. But Credit Karma is being acquired by Intuit, which is the parent company of TurboTax. So, as a regulatory concern, Credit Karma -- tax preparation is not their primary business, so they really don't care about getting rid of it. The fact that Square is buying it, it kind of fits into, I mentioned Sarah Friar, it fits into her, kind of, mindset that she wanted Cash App to be able to do for people whatever their banks can do. So, her vision was to have checking accounts, personal loans, insurance products, mortgages, auto loans, the whole nine yards, and tax preparation is a pretty natural fit in that.

The concern is whether Square is getting into too many different growth verticals at the same time. We know and we've talked about Jack Dorsey's love affair with bitcoin, which as I've said before, is my least favorite part of Square. But Square is trying to build out an online store right now, their brokerage is just getting going really. You remember they launched the ability to trade stocks on Cash App. And they're applying for a banking charter at the same time, and maybe going to do personal lending through the Cash App, who knows. So, the question is, the businesses that they have now are growing at phenomenal rates, you know, 40%, 50% revenue growth a year. Should they just focus on keeping those growing for the time being or should they spread their focus out into even more verticals while everything is going so well, and that's kind of the big question.

I mean, tax planning is not a core competency of Square, it's not going to be a core competency of Square. But the question is, does that make Cash App more valuable to people and therefore boost membership and boost monetization, things like that? So, I'm curious to know where you stand on that, but I would be in favor of this move as long as it was for a reasonable sum of money.

Moser: Yeah, I think you probably hit on the point I would have mentioned, you know, price to me [laughs] is everything here. Like, as long as they're getting a fair price and they're not out there trying to outbid someone else for this, because I do feel like I'm getting a little concerned, are they pursuing too many verticals at once versus not really, you know, just focusing on doing a couple of things really well right now. And I can see the merits to both, we can see examples throughout history of it working out both ways too.

So, then when it comes to his management style, it really just boils down to making sure that you're hiring good people. And I think he tends to do that, right? He's even said before that he sees that as his primary role, is basically finding the talent to help run these businesses and then letting them do their thing. And so, hopefully that does work out the way it's worked out for Buffett and Munger through the years over at Berkshire Hathaway. I certainly like the markets they're pursuing, I mean, it's not like they're -- remember, when they got rid of Caviar, right, remember they got rid of Caviar, the food delivery business. I mean, that to me was a perfect example of a business that just wasn't really in line with the rest of the stuff they were doing, the tax business could be, I don't know what kind of traction it will gain, but certainly, it made me think about that bigger question of, all right, let's make sure these guys aren't trying to do too many things at once, because that can really be difficult sometimes. It's something to keep in mind, I guess.

Frankel: Yeah. And like I said, it needs to be for a reasonable price and it needs to add value to the business, and the difference between Caviar and this; Square wants all their businesses to now fall into two very distinct baskets. Does this help people with personal finance, does it help with small business finance? Caviar doesn't really fit into either of those. But tax preparation definitely fits into the personal finance basket, so that's why it makes a little more sense than a Caviar-type business, but like I said, it has to be for the right price. I can't imagine credit cards, tax prep business is a giant moneymaker at this point.

Moser: Yeah. I mean, TurboTax, just they really do own that market in a lot of ways too, so. But it can be sticky, so if they do it right, who knows. Jack has a good long-term focus, and I really like that about him, and so we'll -- I remain a very happy shareholder and I'm sure you do too.

Well, before we wrap it up, Matt, as always, we like to give our listeners one to watch for the coming week, and I'm going to let you lead it off here. What is your one to watch for this coming week?

Frankel: I am watching Berkshire Hathaway. Coming up on Saturday -- they're the only company that ever reports earnings on a Saturday, but their earnings are coming out this coming Saturday. Berkshire's earnings don't tell us all the information we want, we want to know about their stock portfolio, because that's like half the business. And you don't get much information about that in the earnings report, but what you should pay attention to is, one, how much cash do they have, because that'll tell you, if they bought a lot of stocks are not. You know, if their cash portfolio went down from $120 billion to $100 billion, for example, and they didn't make any major acquisitions, you can pretty much bet they spent that on the stock market.

The buybacks is another big issue, did Berkshire buy shares when it's trading at a historically low valuation? And how are their operating businesses doing? Their operating businesses are generally designed to do well no matter what the economy is doing. I think of GEICO, the insurance company, they sell a product people need no matter what. So, operating businesses, cash, and buybacks are what I'm watching. And then by the 14th, they have to submit their 13-F, which will tell us more about their stock portfolio and what they've bought and sold.

I'm curious to see. There's been speculation that Berkshire might have pared back its Apple investment after the recent run-up. So, I'm curious to see what they did.

Moser: Yeah. Well, we'll have a lot of fun digging through that 13-F and talking about it on a future show here [laughs] in the next couple of weeks for sure.

I am going to keep an eye out for Bill.com's earnings; they come out later this week, I think on Thursday, November 5th, we'll see their earnings drop. And we talked about this company on the show before, it's the stock that I recently bought -- you know the episode, we were talking about the next stock we were going to buy. And this is a neat business from a lot of different angles. I think one of their key points of focus is their work with artificial intelligence, the AI-driven platform which really helps to streamline the transaction lifecycle, it automates data capture and entry, it routes bills for approval, detects duplicates, fraud. I mean, it really -- this is a neat business from a number of different angles and focused on helping the small- to medium-sized businesses with their back-office operations and eliminating paper.

Paying attention to total customers, total payments, you know, the volume that flows through the network, the network members; this all is really helping to drive very impressive revenue growth and, I think, what appears to be a growing network effect, which can be a nice competitive advantage. But I'll be keeping an eye on that one.

But, Matt, I think that's going to do it for us this week. I appreciate you, as always, taking the time out of your day to join us and give our listeners the good stuff, as they say.

Frankel: Of course. I will see you guys next week.

Moser: All right. Man, I'm looking forward to it. Remember you can always reach out to us on Twitter @MFIndustryFocus, or you can drop us an email at IndustryFocus@Fool.com.

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

Thanks, as always, to Tim Sparks for putting the show together. For Matt Frankel, I'm Jason Moser, thanks for listening, and we'll see you next week.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.