Consumer stocks have been the biggest beneficiaries of the drop in oil and gas prices reporting some of the best results from earnings season. Visa (V) and Mastercard (MA) were also standouts and gave a great insight into the spending habits of consumers. The drop in gas prices is like a tax cut in an improving economy, with more jobs consumers should be able to save more and spend more. So far the read through is that consumers are still cautious but both of these companies are expecting this to change.
From Charles Scharf the CEO of Visa. "This drop amounts to approximately $60 per month for the average consumer. According to our surveys, approximately 50% of the savings consumers are seeing is being saved. 25% is being used to pay down debt, and approximately 25% is being spent in other discretionary categories. These categories include grocery, clothing, and restaurants. This is consistent with what we've seen in our own spend data. As we look forward, we would anticipate the savings will accumulate, and ultimately we would see more spent in the discretionary categories, including higher ticket items such as home improvement, electronics, and travel and entertainment."
"And just keep in mind a little bit, the average of $60 a month, $60 a month in its own right
doesn't change – it's unlikely that people change their behavior. I mean, if you boil it down to people filling up their tanks once a week, right, at that point you're down to $15 a week. How are you going to go spend differently? So the places that we're seeing it, which I mentioned are the grocery stores, quick service restaurants especially, are the types of places where you would see that kind of additional dollar amount. But as I said from our surveys, we know that 50% of it is being saved. That amount of money accumulates, people start to see that they have additional money, and then over a period of time will potentially buy higher-ticket items is what we would anticipate."
From the MA CEO Ajay Banga. "I think about the fact that it's $800 a
month (I think he meant year, Jason), or whatever it is to a middle-class family, the gas prices are down 12% over this same time the previous year, and that's
not a small number here. So, when we put all that into context, you would've thought
it'd flow through. But the way, I think about it, I was in Davos, we've talked to so many other fields about this, I
just feel that maybe it is that it's going to take three months or four months for the U.S. consumer to feel that this is
something that's going to be with them for a little while. If you have a longer-term perspective of the price of gas,
not going back to $100, but maybe settling in at $75, $80, that's where we're thinking. I don't think the U.S. consumer
knows whether to expect this to be sticking around or not, so I think there's some
degree of, let's say, the desire to see that through before they really start
spending that kind of money. So, if you were to ask
my opinion and my guess, I would say, we're probably a month or two or three
away, if this price stays where it is, for
them saying, you know what? I do have $800 a month more in my pocket, and I
could afford to go and buy X. I think that's kind of what I think about it".
Source: Visa investor day
Both companies were impacted by the decline in gas prices reducing revenue growth by 1%. However this was offset by the trend to e-commerce. The great thing about e-commerce is that cash does not work in the online world and it is growing nearly three times the rate of retail spend. Cash is still the number one competitor for these companies and luckily for them cash can't be accepted online. Also while V and MA are big marketers cash can't advertise. Both companies are in a great position when their main competitor (cash) cannot advertise back!
Jason
Disclosure: Decisive has a long position in Visa (V) stock.
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