After this year’s COVID-19 crash and the continued uncertainty of the economy, many people are searching for stalwart stocks to purchase ahead of the next downturn. At the same time, rational investors know that market declines are excellent opportunities to buy the securities of reputable companies at a discount rate. Then what makes the stock ripe for investment after the market collapses?
There are three things I’m looking for that suggest that an organization would be stable while others aren’t: strong profit margins, a lot of cash on hand, and more than enough cash flow that compensates for potential debts and expenditures. With all this in mind, let’s learn more about the three companies that could be worth adding to your portfolio before or after the next meltdown.
Payment processing giant Mastercard (NYSE: MA) is a significant potential investment due to its highly efficient, easily scaled, and time-tested business model. Any time a customer makes a purchase using one of the company’s cards, Mastercard takes a cut, allowing him to earn an incredible amount from the countless transactions that occur every day. Thanks to the increasing rise of cashless payment processing, Mastercard is well placed to make the most of its vast space presence.
With a profit margin of 45.1 percent, $11.5 billion in cash on hand, and a free cash flow of $8.2 billion over the last four years, Mastercard offers investors a lot to like. In the strictly hypothetical case that Mastercard’s revenue fell to zero immediately, it’s $7.2 billion in backlog operating costs will be covered for at least one year. Nearly one-third of its $12.5 billion long-term debt is due within the next five years, which means that it will not fail to remain current even though its revenue is hit.
Mastercard’s stock is still beating the market, even though the size of its initial fall during the recession was closely followed by the S&P 500. Finally, as a bonus, the firm’s modest dividend payment has not decreased since it became public, even during the Great Recession, so that investors can be sure of its continuity.
Like Mastercard, Visa (NYSE: V) is a card-based payment system that has been tested some time thanks to a globally-executed toll-collecting business model. With billions of payment cards in active use worldwide, Visa can process more than 65,000 transactions per second, earning revenue with each card swipe. On an annual basis, Visa handled about 70 billion transactions in 2018 compared to 34 billion Mastercard transactions, with a slightly higher market share. In reality, Visa is the largest card-based payment processor based in the U.S. by the transaction amount.
Visa has solid fundamentals, too. Its gross margin of 51.4% is also higher than that of Mastercard, and its dividend is almost the same. Despite getting more sales than Mastercard, with $22.9 billion in late 12-month inflows, Visa has lower operating costs. Visa’s liabilities also contain about $3 billion in current debt for the second quarter, in addition to $703 million in pension and retirement liabilities.
Visa’s stock has also been well ahead of the market for the year. Critically, Visa holds a near-duopoly in the cashless payment sector with Mastercard. This means that, as cashless payment becomes the norm, Visa’s profitable core business will be increased. Finally, both businesses would benefit from increased economic activity in the aftermath of pandemic-induced reductions.
Holdings in PayPal
PayPal Holdings (NASDAQ: PYPL) is a wide portfolio of growth in financial services. Unlike Visa and Mastercard, PayPal’s primary business is online payment processing rather than card processing. When companies or customers are trying to move funds or issue invoices electronically, PayPal is on the go; as of 2016, 99 percent of internet users in the U.S. were aware of PayPal, and 76 percent used it in the past. With each move, the organization receives a fee that is a percentage of the hands moving. PayPal also provides embedded payment processing software for retailer websites, eventually stealing Visa and Mastercard’s market share in the process. E-commerce is rising exponentially, so PayPal is well placed to succeed.
PayPal is a much younger business than either Visa or Mastercard, although it is not as profitable, with a margin of 13.4 percent looking puny in contrast. It also lost less value in March, rising by more than 93% this year through Tuesday’s close, far outpacing the other two. The company’s lower profitability is mostly due to its high sales cost of $10.6 billion over the last 12 months, not to mention its $5.7 billion operating expenses.
The company is rich in cash, with $13 billion in hand to help it bounce back from a big mishap. Cash on hand would also open the door to fintech firms’ acquisition that could boost their ability to service customers. This is significant, as, over the last 10 years, PayPal has voraciously absorbed smaller players, culminating in its $4 billion acquisition of Honey Science’s online couponing company late last year.
Acquisitions aside, PayPal posted just $8.8 billion in long-term debt in the last quarter. When combined with its strong cash position and flexible business model, the company will continue to expand for quite some time. In other words, PayPal is poised to come back from the next major market downturn, so it would be nice to get a discount.
10 stocks better than Mastercard Integrated
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