“Given our numbers look good, why is our stock price lower than Mastercard’s?” Asked a participant at a recent VISA financial intelligence training session in sunny Seattle. “Their shares are worth about $550 and ours trade around $180. Why is their stock price three times what ours is?”
“Good question,” I replied. “Let’s take a closer look at it.”
Reviewing the Yahoo finance company comparisons (finance.yahoo.com), the class learned that VISA’s market capitalization (total shares outstanding times the current stock price) was almost double Mastercard’s market cap. Yet, when one looked at Earnings Per Share (EPS), Mastercard generated almost $23 dollars of EPS versus about $3.50 for VISA. So, while the public markets valued VISA as a company higher than Mastercard, shareholders did much better, at least on an EPS basis, at Mastercard than at VISA. The key factor driving these differences: total number of shares outstanding. In other words, how many slices were in each company’s pie.
When it combined its different operations and divisions into one company and went public in 2008, VISA issued those entities/owners shares. It also sold shares to the public to raise capital to grow the business. By May 2013, when we held this session, VISA had about 790 million shares outstanding. In comparison, although Mastercard went public two years before VISA, it had about 121 million shares outstanding. That difference, not performance metrics, drove the spread in earnings per share and stock value that participants asked about.
As this discussion illustrated, like so many things with Financial Intelligence, it’s important to look at more than one metric to build an understanding of a company’s performance. It’s also essential, like these participants did, to ask questions about trends or circumstances that seem to be an anomaly. Analyzing the numbers leads to better questions and better questions lead to more understanding of the company’s performance. Applying that understanding, like session participants did, leads to improved shareholder returns.