It’s been a few weeks since my last blog post on the novel coronavirus (COVID-19) pandemic, so this seems a good time to revisit some of the statements I made then.
At the time, I pointed out that equity analysts were still forecasting positive earnings per share for the major card networks, albeit lower than before the crisis. On March 31, 2020, Visa released an 8-K SEC filing, discussed by my colleague Brian Riley here that reported a drop in U.S. payments volume (credit and debit) of 4% in March 2020 compared with March 2019. Cross-border payments volume dropped by a much greater amount, 23%, in March 2020 compared with March 2019. However, as I wrote in the earlier blog, Visa expects to report revenue growth for the first quarter, just not as much as its original guidance. Visa now projects revenue growth in “the mid-single digits.” Let’s check in and see how the equity analysts have revised their earnings estimates:
Quite a lot, as it turns out. Whereas estimates for American Express were unchanged as of March 23, now they have gone down 21.7% on average. Note that all these numbers are averages, and the range can be wide. For example, the low estimate on Discover is -$3.88. However, also note that the analyst consensus is still positive for all four companies (outliers aside). That holds true for the second quarter as well. In fact, the average estimate for EPS is actually higher for American Express and Discover, and somewhat lower for Visa and Mastercard. It seems possible that some analysts are waiting for the actual first quarter earnings results, and we will see more downward revisions at that point.
This does seem decoupled from what we are seeing in the news, however. For example, on our sister site PaymentsJournal’s COVID-19 page, we have data from our partner Facteus showing sharp drops in consumer spending:
Figure 1. US Consumer Spending Down in March 2020.
Here we can see that year-over-year consumer spending went negative on March 19, 2020 and bottomed out on March 30 at -30% before bouncing back in recent days. Notice the title of this blog, which has a dual meaning: While things could be worse in the sense that the payment companies could be losing money, things could also be worse in the future, in ways that analysts are reluctant to recognize. For example, economists vastly underestimated jobless claims for two weeks in a row before catching up this week.
As industry analysts, we face this problem as well. If we give ourselves over to the worst case scenario, we risk influencing our clients to take steps that ultimately prove unnecessary and destructive. If we refuse to consider the worst case, however, we fail in our duty to warn our clients of potential problems. Part of the dilemma is human psychology; we all have jobs and families and don’t want to think too much about frightening possibilities. However, part of it is that we are in uncharted territory, and historical comparisons are not always useful. Saying that unemployment will soon be in Great Depression territory ignores the fact that, in 1933 the country had a vastly different economy and almost none of the safety net programs that are in place now. The Federal Reserve and the U.S. Treasury have injected an unprecedented level of money into the economy, as have the White House and Congress. Even unemployment doesn’t mean what it used to, with enhanced unemployment insurance making up a large portion of lost pay.
As an example of how disturbing data can be looked at more than one way, let’s examine the latest edition of the Bloomberg Customer Comfort Index (see Figure 2). Here, we see a mixed message:
Figure 2. U.S. Consumer Confidence Plunging.
On one hand, we are seeing the fastest decline in consumer confidence on record. On the other, the confidence was last at this level in 2017, just three years ago, and I don’t remember 2017 being an especially difficult year economically. So, things could be worse, both now and in the future. Part of what we are seeing is a long-expected end to the country’s longest expansion in history. Things were always going to get worse; what COVID-19 has done is make them worse faster, and to a greater degree, than expected.
Here at Mercator Advisory Group, we are attempting to stick to what we know best: the payments market. Based on what we know now, the payments industry is holding up rather well. Banks are going to experience a lot of pain, but more in the credit risk side than the payments side. There is a reason that payments stocks are appearing on lists of best buys in the crisis.
We will continue to keep you updated through this blog and on the PaymentsJournal website as we get more information. For now, stay safe and stay hopeful.