There are few investments that are better than buying into an oligarchy. The credit card sector is dominated by very few issuers, and one of them is the almighty MasterCard Inc (NYSE:MA).
Its quarterly earnings were not only terrific, but as Americans have returned to their overspending ways, it looks like even brutal currency effects won’t matter that much to MA stock.
The New York Federal Reserve’s fourth-quarter report of household debt and credit telegraphed how robust MA earnings were going to be. Total credit card debt was up $20 billion and approaching $10 trillion. The aggregate credit card limit increased another 0.7% from the previous quarter, even as balances increased as well. Total accounts increased to almost 410 million, while credit inquiries increased 4 million.
It also helps that people are, on a global basis, ditching cash and checks for plastic and debit cards.
All metrics tell us one thing: consumers are spending on credit cards and that could only be good for MA. Earnings reflected all of these trends. MA saw a 12% increase in processed transactions to 11 billion, and a 12% increase in both gross dollar volume of transactions and purchase volume.
MA reported EPS of 91 cents, blowing away estimates of 80 cents, and up 24% over last year. When we drop in the currency effects that every multi-national company is feeling this quarter, EPS still came in up 22% at 89 cents. This came on a revenue increase of 8%, or 3% after accounting for currency effects.
Because MA is collecting juicy fees on all those transactions, it is a cash flow business that I love. MA operating cash flow killed it — up 60% to $911 million.
The balance sheet is a thing of beauty, with cash at $4.2 billion and debt at $1.5 billion, amounting to $2.70 per share in cash. MA has been returning cash to shareholders in two ways, through its 0.7% dividend and repurchasing 11 million shares for about $950 million.
I believe things are only going to improve for MasterCard. Once consumers had decided they had delevered enough in last 2013, the march back to increasing household debt resumed. It’s not going to change. Human beings live beyond their means. We are a consumption-driven world, and almost every society has this issue.
We are a species that wants what we want, when we want, in the way we want. “When” often means “now,” and the temptation to charge it is difficult to overcome. I view MasterCard almost like a tobacco company. It provides a product that people desperately desire, and can have trouble controlling.
There’s also a big development brewing in China, which is going to end the monopoly in bank-card clearing so that China UnionPay Co. is no longer the only game in town. Naturally, MasterCard will benefit.
At a net-cash-adjusted price of $87.50, MasterCard trades at 26x FY15 estimates of $3.47. Now, I expect MasterCard to continue beating, as it has for the past several quarters, by around 8%. So realistic EPS might be closer to $3.75, giving it a price-to-earnings ratio of 23.5.
Long-term analyst estimates are for 17.45%, plus the 0.7% dividend, means an 18.15% expected growth rate.
For a growth stock in a oligarchy, a price/earnings-to-growth ratio of 1.3 is very attractive. I think MasterCard is a buy.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
