Mastercard (MA) is, by a significant margin, the second-most valuable credit card network in the United States and other developed economies. The company has had a truly phenomenal run in recent times.
The stock’s inexorable climb higher has taken a pause in recent months. The stock recently peaked at $100 and has fallen since the relatively soft Christmas shopping season and the market volatility of 2016. MA stock now sits almost dead center in the middle of its 52-week range. Is this the time to jump on board with Mastercard stock?
MA Stock: Pros
Impressive Growth Track Record: Mastercard has one of the most impressive growth track records of any stock I’ve looked at recently. In 2001, the company did $1.6 billion that year in revenue. In 2015, it notched $9.7 billion in sales. That’s utterly fantastic growth. Amazingly, the company managed to boost revenues between 2007 and 2009 by 25% during a time when most of the world was struggling to keep the lights on.
Earnings growth has been even more impressive. MA stock’s earnings have risen from 20 cents per share in 2001 to $3.35 last year. Even since just 2009, earnings have tripled. Book value has enjoyed similarly impressive growth. Over the past 10 years, it has compounded at more than 19% annually. An investor in 2006 would have, including dividends, made 20x their money over the past decade in MA stock.
Britain: Mastercard is making a big push further into the UK to start 2016. Earlier this month, Mastercard announced it will be paying just under 1 billion pounds ($1.4 billion) to take over Vocalink. Vocalink is a large UK payments processor. It currently processes 90% of UK payroll, virtually all state benefits, and 70% of household billpay. This gives Mastercard a huge leg-up in the country.
Mastercard currently hails with 65% of the UK credit market, but less than 5% of the British debit card market. However, the purchase of Visa Europe by Visa (V) last year sets the stage for Mastercard to take debit card share. The banks that formerly owned Visa Europe had reason to stay loyal to Visa cards. Now that the banks don’t profit from their ownership stake in Visa Europe, they can shift to Mastercard products more easily. The bolt-on Vocalink acquisition shows that Mastercard is capitalizing on the opening.
Great Capital Allocation: Mastercard, like Visa, is an extremely profitable business. The two of them are the runaway leaders in a low-competition tightly-controlled market. Since both Visa and MA are formidable companies, they avoid anti-trust scrutiny. Since the two of them control majority of the market, they can maintain relatively high prices and secure large profits. The barriers to entry are notable. It’d be extremely hard to build the network and store acceptance necessary to get a competitor off the ground.
Remarkably, Mastercard is even more profitable on a Return on Equity (ROE) basis than Visa. For the trailing 12 months, Visa has put up an ROE of 23%. This is a great figure. Anything over 20% is generally viewed as outstanding. But Mastercard blows them away. MA stock’s ROE is an other-worldly 59%. Of all the American companies listed in the US, according to Gurufocus.com, only around 100 have an ROE as high as Mastercard’s. Compared to Visa, Mastercard is also far more profitable in terms of generating profits on its assets.
Alas, as with any company, it’s not all positives for Mastercard stock.
Mastercard Stock: Cons
High Valuation: Even with the recent sell-off in MA stock, shares remain pricey. This is to be expected for such a high-quality business. Still, overpaying for stocks can lead to subpar returns.
MA stock currently sells at around 27x earnings. This isn’t a terrible figure for an unusually profitable business. Visa trades at the same level as well. But 27x earnings is almost never a bargain. You’re paying full valuation for a business that Wall Street recognizes as among the cream of the crop.
On other valuation metrics, MA stock looks even more highly priced. It trades at an extremely rich 17x EV/EBITDA level. And it commands an exceedingly generous 27x free cash flow and startling 16x book value. Wall Street recognizes that this company is virtually immune to competition, other than Visa, and is pricing it accordingly.
Not Particularly Cheap Compared To Visa: The main general con to Mastercard is valuation. No one is denying that MA stock represents an outstanding business. However the share price is high; even when you compare it to Visa.
Mastercard shares trade at the same PE ratio and price/free cash flow ratios, but on other metrics, Visa appears somewhat cheaper. For starters, Visa has a more substantial balance sheet, with more than $20 billion of cash on hand. Visa trades at about 5.9x book, which is still expensive. But compared to 16x at Mastercard, Visa is much cheaper. Visa also wins by a decent margin the comparison on EV/EBITDA versus Mastercard.
Finally, it’s worth noting that Visa has significantly higher operating and net profit margins than Mastercard. The superior returns on equity and assets for Mastercard seem to represent superior capital allocation, rather than an underlying economic advantage to Mastercard’s business. This isn’t to take anything away from MA, but Visa’s business appears to be just as robust on a purely economic basis.
High Expectations Leave It Vulnerable: MA stock is vulnerable to a short-term selloff. Analysts have high expectations for the firm, with earnings expected to rise well at a double digit clip in 2016. Mastercard’s business, particularly overseas, is likely to be hit by the same forces of global deflation that have been causing many multinational firms to struggle.
Mastercard loses some revenue to currency effects as the U.S. dollar continues to rise. And it seems that the domestic U.S. economy, while not going directly into a recession, is showing significant signs of a slowdown. Mastercard’s earnings are still going to grow in 2016, make no mistake. But if economic headwinds cause earnings growth to come in slower than expected, MA stock could take a meaningful dip.
Verdict
MA stock has had a tremendous run over the past decade. It’s the sort of company you want to buy and hold forever. Even so, there is a good and bad price for everything. The current $92 quote seems a little aggressive on a valuation basis. I’d rather buy Visa, if I were taking just one of the two at current prices. If you want to buy MA stock, I’d wait for a pullback to the $70s on an earnings miss.
At the time of this writing, Ian Bezek had no positions in any of the stocks mentioned. You can reach him on Twitter at @irbezek.
