Can MasterCard Keep Growing?

With shares of MasterCard Incorporated (NYSE:MA) trading at around $535.47, 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 is addicted to growth. If the global economy can at least hold its own, this should be excellent news for investors. MasterCard has recently announced partnerships and made other strategic moves, which have included:

  • Partnership with VimpelCom that will offer mobile money to 212 million customers in 18 countries
  • Partnership with Equity Bank that via Ezetap will offer mobile point of sale in Kenya
  • Launch of payment service program Near Field Communication in Brazil

Furthermore, MasterCard’s Mobile Money Partnership Program is seeing growth. For example, eServGlobal and Oltio have recently joined. Other positives for MasterCard include improved pricing, increased number of transactions, and strong gross dollar volumes. The biggest negatives for MasterCard are increased operating expenses, currency fluctuations, increased competition, and regulatory challenges. Do the positives outweigh the negatives? That will be determined in the Conclusion section. There are many other important factors to consider prior reaching a conclusion.

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The chart below compares fundamentals for MasterCard, Visa Inc. (NYSE:V), and Discover Financial Services (NYSE:DFS). These three companies differ in size. MasterCard has a market cap of $65.78 billion, Visa has a market cap of $110.77 billion, and Discover has a market cap of $22.40 billion.

MA

V

DFS

Trailing   P/E

24.42

46.58

10.09

Forward   P/E

17.72

19.68

9.94

Profit   Margin

37.33%

22.46%

34.47%

ROE

43.07%

8.77%

26.03%

Operating   Cash Flow

$2.95 Billion

$899.00 Million

$3.04 Billion

Dividend   Yield

0.50%

0.80%

1.20%

Short   Position

1.40

1.20

0.60

 

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 much stronger than the industry average of 3.40. MasterCard is cash-rich. Companies with a lot of cash and little to no debt tend to navigate through difficult times better than companies consumed by debt. Visa is also very fiscally responsible. However, Discover is highly leveraged. Using debt to fuel growth can be a powerful weapon when times are good, but it will often come back to haunt that company if the economy sours.

Debt-To-Equity

Cash

Long-Term Debt

MA

0.07

$5.04 Billion

$51.00 Million

V

0.00

$2.78 Billion

$0

DFS

2.05

$4.06 Billion

$20.02 Billion

 

T = Technicals on the Stock Chart Are Strong  

MasterCard has underperformed its peers over the past year. This is in addition to the lowest yield of the three. However, MasterCard has performed very well over the past three years.

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1 Month

Year-To-Date

1 Year

3 Year

MA

5.14%

9.15%

23.40%

119.30%

V

6.13%

10.74%

40.64%

89.91%

DFS

18.65%

16.34%

34.18%

199.90%

 

At $535.47, MasterCard is trading above all its averages.

50-Day   SMA

520.41

100-Day   SMA

502.13

200-Day   SMA

469.98

 

E = Earnings Have Been Impressive          

Revenue and earnings have consistently improved on an annual basis. The growth has been so impressive that the question must be raised whether or not this pace is sustainable.

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 a moderate increase in revenue and a substantial increase in earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

1.73

1.76

1.82

1.92

1.90

Diluted   EPS ($)

0.17

5.36

5.55

6.17

4.86

 

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 Support the Industry

The payment services industry has been strong. In addition to organic growth domestically and internationally, there have been many partnerships and acquisitions. Growth in mobile should further fuel growth going forward. However, if the Cyprus situation leads to contagion in Europe, the industry will suffer a great deal.

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Conclusion

MasterCard has consistent top-line and bottom-line growth, superb debt management, good cash flow, strong margins, and it has been aggressive in regards to acquisitions, which should help fuel future growth. However, the stock is getting a little expensive here, and the situation in Europe is beginning to look concerning. MasterCard is a WAIT AND SEE.

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