Buffett’s stake, disclosed in a 13F filing, totaled 216,000 MasterCard shares valued at $60 million — a tiny portion of its $53.6 billion equity portfolio. On the face of it, a stake in MasterCard could be a bet by newly hired investment manager, Todd Combs, on a future increase in consumer spending.
But let’s look deeper at MasterCard, which provides credit, debit, and prepaid programs for 22,000 financial institutions. And MasterCard’s economic performance over the last five years has been impressive. After all, with $5.73 billion in sales growing at an average of 13.5% a year since 2006 and net income of $1.95 billion spiking at a 47.2% average annual rate over that time frame, MasterCard is a profit-growing machine with an impressive 34% net profit margin.
But what has MasterCard done for investors lately? In the first quarter of 2011, the number of transactions climbed 11% and volume growth rose13% while client losses fell further. Revenue grew 15% to $1.5 billion with operating margin of 55.7% up 2.2 percentage points. MasterCard’s EPS of $4.29 beat Lazard Capital Markets’ forecast of $4.10. And MasterCard boosted its EPS estimates for 2011 to $17.15, and to $20.16 for 2012.
Does this performance mean that you should add MasterCard stock in your portfolio? To help with that decision, we can look at its price-to-earnings-to-growth (PEG) ratio — a way to determine whether the value that the market assigns a stock is justified by the rate at which it expects the company’s earnings to grow. I think a PEG of 1.0 is a fair price, and anything below that is a bargain.
MasterCard’s PEG of 1.07 is a reasonable value. Its P/E is 18.8 and MasterCard’s earnings are expected to grow 17.5% in 2012 to $19.99 a share. With Buffett’s backing and the real chance that it can sustain a higher earnings growth rate based on its performance over the last five years, buying MasterCard stock could be a profitable addition to your portfolio.
Peter Cohan has no financial interest in the securities mentioned.