Visa And Mastercard – Same Business, Different Results

I don’t think there’s much of an argument when Visa (NYSE:V) and Mastercard (NYSE:MA) are labeled wonderful businesses. They both operate like tollbooths – largely due to their dominant market share, the highly regulated industry they operate in with high barriers of entry, their technological “know-how”, and their hard-to-reproduce size and scale. These companies are often lumped together in the minds of investors, as they appear to run identical business models, but I think they’re different in many ways as well – especially when examining their respective returns on equity.

A DuPont analysis reveals the differences

I created the below charts using data from Visa and Mastercard’s 2017 10-K forms. I also decided to use the adjusted, non-GAAP numbers (excluding things like charges and one-time items) provided by the management of both companies in their respective 10-Ks.

The information I used for adjusted net income (and also to extrapolate pretax income, or EBT, and operating profit, or EBIT, using the adjusted operating margins and adjusted effective tax rates) can be found on page 35 of Visa’s annual report and page 37 of Mastercard’s. Assets, equity, and revenues were not adjusted for this analysis.

Despite nearly identical business models (and similar tax rates and interest burdens), the difference between the two companies can immediately be felt when examining their respective returns on equity. Mastercard’s absurdly high ROE of 87.76% initially looks much more attractive than Visa’s ROE of only 25.38%, but there’s also more to this picture.

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