One of the smartest plays you can make as an investor is to invest in a company with limited competition. An oligopoly means that the market is controlled by a limited number of players and has a very high barrier to entry. Mastercard Inc (NYSE:MA) is one such player in one such market. And MA stock is exactly the kind of investment favored by my stock advisory newsletter, The Liberty Portfolio.
Mastercard processes payment transactions — which includes that chain of authorization, clearing, and settlement — everytime you swipe one of its cards. Yet it is much more than that, handing information and consulting services, issuer and acquirer processing solutions, and payment and mobile gateways.
Mastercard is increasing its various payment products and solutions for cardholders, merchants, financial institutions, and governments, and a variety of options for consumers to access funds in other accounts. It also has a prepaid card program, as well as commercial payment products and solutions.
In particular, its Masterpass program is really catching on. It’s far more than just a digital wallet, but an entire “commerce enablement platform”. But what I really love about it is the branding and marketing. It’s no small move to try and break into this market, and for it to impact MA stock.
MA came up with a terrific campaign: “Don’t Just Buy It, Masterpass It”. The goal is to make the word “Masterpass” into a verb, just like Uber has become. The commercials are really well designed, teaching viewers how to use Masterpass in engaging ways.
Blow-Out Earnings
MA stock delivered great earnings on Tuesday, as EPS came in at $1.34, above the $1.23 estimate and 23% ahead of last year’s $1.08 per share. Net income came in at $1.4 billion, about 18% ahead of last year’s $1.2 billion.
I’m not crazy about the increase in expenses, but quite a bit of this increase was the result of acquisitions and integration, so that’s good news.Revenues came in at $3.4 billion, up 18% year over year, and was mostly the result of a 17% increase in the number of switched transactions — coming in just short of 17 billion. A portion of this impressive increase was due to the 15% increase in cross-border volumes. The gross dollar volume of transactions was a smashing $1.4 trillion. Think about that! Trillion. With a “T”. The world is so addicted to plastic that it transacted $1.4 trillion on MA-branded cards alone.
For the year so far, revenue is up 15% to $9.2 billion from $8 billion. Operating margins have improved 70 bps to 55.5%. Net income is up 18% to $3.7 billion. On a diluted EPS basis, MA stock is enjoying $3.43 per share.
Incredibly — and again the result of being part of an oligopoly — some 2.4 billion Mastercard and Maestro -branded cards were in consumer hands at of the end of the quarter.
Meanwhile, Mastercard remains in solid financial shape. Cash and investment sit at $5.56 billion, offset by $5.39 billion in debt.
MA earnings come on the heels of excellent results from other payment processors. This tells us that global consumers continue to gobble up their credit lines.
It looks like MA stock is going to come in with EPS of around $4.65 this fiscal year. With the stock at $149 (and it did not move after this great report), MA stock trades at 32x EPS.
With 18% EPS growth, and adding in a 10% premium each for having a world-class brand names, great cash position, and excellent cash flow, I might normally consider a 23x multiple as being fair value. However, because of its high EPS growth rate, MA stock it qualifies as a growth equity, and that means a PEG ratio of 1.4 is acceptable.
I think if you want to hold MA stock for the long-term, you can buy here at a reasonable price.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
