The major credit card companies -- Visa (NYSE:V), MasterCard (NYSE:MA), and American Express (NYSE:AXP) -- are firing on all cylinders this year. Each is generating stellar growth in their core metrics, clearly reaping huge rewards from an improving global economy.
With their coffers swelling this year, you'd be hard-pressed to find anything to gripe about when it comes to the credit card processors. Yet the market seemed unimpressed with each company's earnings report. Here's what may be the real culprit.
Something's got to give
Visa's full-year earnings per share jumped 23%, reflecting benefits from both strong organic growth and the company's considerable share repurchases. Total processed transactions grew 10% in fiscal 2013. And, Visa consistently buys back stock to the accretion of shareholders. It put a cherry on top of the earnings with a newly authorized $5 billion share repurchase program.
MasterCard's net income rose 14% in its most recent quarter, thanks to broad-based strength across the company's geographies. Gross dollar volumes grew 15% to over $1 trillion, and worldwide purchase volumes increased 14%.
For its part, American Express reported 15% growth in earnings per share, as card member spending and loans continue to grow. Moreover, loss reserves are improving, and Chief Executive Officer Kenneth Chenault noted, "Credit quality indicators remained at historically strong levels."
As previously mentioned, there has been nothing but good news in store for the major credit card companies from an operating standpoint. Consumers are digging themselves out of the massive financial hole caused by the Great Recession and are back to spending (and borrowing) at healthy levels. Revenue, loans, and profits rising for the credit card processors mean great things going forward.
Of course, their shares have reflected this, as each stock has generated returns of more than 40%, not including dividends, over the past 52 weeks, which far outpaces the returns of the market. Yet the market reaction to each company's recent earnings results has been less than stellar. American Express increased only slightly after reporting results, while both Visa and MasterCard fell after reporting their own earnings. As a result, investors may be understandably asking: What gives?
Valuation is a cause for concern
The answer to why these companies would see their share prices suffer in the aftermath of reporting such positive results may lie in their respective valuations. Rising share prices, especially to the extent that each of the credit card processors saw over the past year, bring rising expectations as well. For instance, Visa shares exchange hands for 26 times their full-year fiscal 2013 EPS.
To be fair, valuations look lofty among each of the credit card processors. MasterCard trades for 30 times trailing earnings, and American Express is the "cheapest" of the three, with a trailing multiple of 20 times earnings. These two, and Visa as well, are trading for significant premiums to both the broader market and their industry. The S&P 500 holds a trailing-12-month multiple of 19 times earnings. The financial sector is even more cheaply valued, at just 14 times trailing-12-month earnings.
Of course, looking backward doesn't tell the whole story. After all, the stock market is a forward-looking mechanism, and each of the three major credit card companies is growing, which means they have an opportunity to grow into their valuations. However, even their forward-looking valuations seem lofty.
Visa, MasterCard, and American Express trade for 19 times, 23 times, and 15 times, respectively. This compares with forward earnings multiples of 15 times and 12 times for the S&P 500 and S&P 500 Financial sector, respectively, based on estimated 2014 earnings.
The start of a trend?
As a result, investors wondering why stocks decline after reporting great numbers should look to valuation as a possible culprit. There is a silver lining here, which is that the market has a tendency to over-run on the downside as well as the upside, and companies with rising profits and falling share prices quickly turn into great opportunities. Therefore, should Visa, MasterCard, and American Express continue to fall, investors would be wise to consider them.