Bill Carcache, Nomura equity analyst, has been touting Visa Inc. (NYSE: V) and MasterCard Inc. (NYSE: MA) as top picks in his coverage universe. The big question is what kind of multiple they deserve. According to his report, “We’ve historically viewed 25x as appropriate for the payment networks, but we now believe we’ve entered a period where that’s too low.” Nomura initiated street-high price targets.

At a multiple of 25 times, there would be a market-implied required rate of return for Visa and MasterCard of roughly 12% in aggregate. This rate has been declining gradually since 2010, and Nomura expects this to continue.

The firm views both card companies as a safe haven within which investors can benefit from the compounding effect of mid-to-high-teens earnings per share (EPS) growth. Essentially Nomura believes the market will be willing to accept a lower rate of return (i.e., pay a higher multiple) for the consistency and growth that Visa and MasterCard offer.

Nomura estimates that a 100 basis point decrease in required returns would increase their justified valuation multiples by up to five turns. In other words, both companies would likely see their valuation multiples approach about 30 times if the market’s required rate of return were to fall to around 11%.

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Bill Carcache detailed in his report:

While required rates of return tend to whip around, we show that Visa and MasterCard not only have been but are in a position to continue to deliver EPS growth that you can count on. They’re certainly not immune to macro weakness, but their 80-90% incremental margins uniquely position them to be able to weather severely adverse market conditions by simply offsetting top-line weakness with greater expense control. On days of extreme market volatility when we see lots of red on our screens, we tend to feel like we’re seeing multiple compression for Visa and MasterCard — our view of their ability to continue to generate mid-to-high teens EPS growth remains unchanged, despite macro challenges.

While the multiple could expand to 30 times, the firm bases its 2015 target prices on a multiple of 27 times 2016 EPS estimates. This implies an upside of 19% for Visa and 26% for MasterCard from current price levels. Visa’s price target was moved up to $323 from $299 and MasterCard’s price target was lifted to $114 from $106. Both companies had Buy ratings reiterated.

It is also worth noting that Visa has a pending four-for-one stock split. Trading will begin on a split-adjusted basis on March 19, 2015.

Shares of Visa were up 1.8% at $276.13 in the second half of Monday’s trading day. The stock has a consensus analyst price target of $290.70 and a 52-week trading range of $194.84 to $277.49.

MasterCard shares were up 1.7% at $91.65. The consensus price target is $98.13, and the 52-week trading range is $68.68 to $93.00.

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