Can Mastercard Keep Its Momentum Going?

With shares of Mastercard Incorporated (NYSE:MA) trading at around $547.73, is MA an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Mastercard recently beat expectations and saw strong increases in revenue and earnings on a year-over-year basis. Worldwide purchase volume increased 10 percent year-over-year, gross dollar volume growth (NYSE:GDV) increased 12 percent year-over-year, operating cash flow increased 104.2 percent year-over-year, and operating margin increased 58.1 percent year-over-year. As if that’s not enough good news, a new share repurchase program worth $2 billion was announced. Other positives for Mastercard include improved pricing, a 0.40 percent yield (lower than peers), quality debt management, and a miniscule short position. Analysts also love the stock: 24 Buy, 10 Hold, 0 Sell.

One of the biggest company-specific negative for Mastercard is an increase in operating expenses – operating expenses increased 5.4 percent year-over-year. There are larger macroeconomic risks that have the potential to impact Mastercard in a negative way. Those risks will be covered in the Trends section. However, it won’t be all bad news in the Trends section.

Now let’s take a look at some numbers. The chart below compares fundamentals for Mastercard, American Express Company (NYSE:AXP), and Visa Inc. (NYSE:V). Mastercard has a market cap of $66.63 billion, American Express has a market cap of $77.09 billion, and Visa has a market cap of $116.56 billion.

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MA

AXP

V

Trailing   P/E

24.04

17.71

50.31

Forward   P/E

18.22

13.34

20.73

Profit   Margin

37.71%

15.12%

21.50%

ROE

43.27%

22.99%

8.61%

Operating   Cash Flow

$3.39 Billion

 $11.20 Billion

  $1.45   Billion

Dividend   Yield

0.40%

1.30%

0.70%

Short   Position

N/A

1.40%

1.30%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio for Mastercard is stronger than the industry average of 3.40.

Debt-To-Equity

Cash

Long-Term Debt

MA

0.00

$5.02 Billion

$0

AXP

3.10

$28.37 Billion

$59.72 Billion

V

0.00

$2.72 Billion

$0

 

T = Technicals Are Strong   

Mastercard isn’t the top performer in this group year-to-date, but it has outperformed its peers over one-year and three-year timeframes.

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1 Month

Year-To-Date

1 Year

3 Year

MA

2.97%

11.61%

24.95%

132.00%

AXP

7.30%

22.68%

18.15%

65.05%

V

8.34%

18.29%

53.13%

111.80%

 

At $547.73, Mastercard is trading above all its averages.

50-Day   SMA

528.46

100-Day   SMA

519.39

200-Day   SMA

485.07

 

E = Earnings Have Been Strong            

Earnings and revenue have both consistently improved on an annual basis. While this isn’t rare, it’s not common, either.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

4.99

5.10

5.54

6.71

7.39

Diluted   EPS ($)

-1.94

11.16

14.05

14.85

21.94

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and earnings. Revenue and earnings have also increased on a sequential basis.

3/2012

6/2012

9/2012

12/2012

3/2013

Revenue   ($)in   billions

1.76

1.82

1.92

1.90

1.91

Diluted   EPS ($)

5.36

5.55

6.17

4.80

6.23

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

All three companies mentioned in this article have been performing well over the past three years. It should also be kept in mind that based on the way these businesses are setup, Mastercard and Visa have less risk than American Express. That said, all three would suffer a significant hit if there was a steep market correction. Mastercard and Visa lost approximately 50 percent in 2008/early 2000, and American Express was hit even worse.

The threat is that the consumer weakens. The good news is that there have been recent reports showing that the consumer is strengthening, albeit very slowly. The threat that many people are overlooking is that thousands of companies are cutting costs in order to improve their bottom lines. The biggest cost they’re cutting is labor. If those employees see reduced income (or no income), then the consumer will weaken.

On the other hand, there is a very positive trend throughout the industry right now. With cash becoming less and less popular by the day, and with e-commerce becoming more and more popular by the day, the industry stands to benefit in a big way. Online shoppers are expected to at least double over the next three years.

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Conclusion

Mastercard seems to have everything going for it. However, it’s highly sensitive to bear markets. Eventually, Bernake will have to back off. When that happens, we’ll see where the market should be without his support. This is the only real concern for Mastercard. Fortunately, even if the stock gets hammered, it should be capable of climbing its way back due to favorable industry trends. Also, this bull run seems to still have legs.

The best approach with Mastercard might be to get involved, but with an exit strategy firmly in place in case the market heads south ahead of schedule (i.e. prior to the unwinding of monetary stimulus and/or the rise of interest rates).

Mastercard is an OUTPERFORM, but an exit strategy is highly recommended.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.

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