When it comes to Mastercard Inc (NYSE:MA), the only question at this point is valuation. MA stock certainly isn’t cheap, trading at likely 30x 2018 EPS, based on commentary given after Thursday’s fourth-quarter earnings release.
But that release also showed a business firing on all cylinders.
Revenue continues to grow sharply, margins are expanding, and Mastercard beat Street earnings expectations for the sixteenth consecutive quarter. Secular drivers like increased e-commerce activity and decreased cash usage should help growth going forward. Mastercard even raised its dividend 14% recently, although the yield still sits well below 1%.
Again, valuation does look potentially stretched. But investors are willing to pay up for quality. Back in October, I made a similar case for rival Visa Inc (NYSE:V), which also looked expensive. V stock has since gained another 15%. MA should have similar upside as 2018 rolls on.
Q4 Earnings
MA stock has given back some of its early gains; it trades up about 3% as of this writing after showing 4%+ gains early in the session. But there’s definitely room for optimism coming out of the Q4 report.
Revenue rose a sharp 20%, a point more than estimates. Most of the growth was organic, with recently acquired VocaLink contributing 3 points. FX added another two points of benefit, thanks to a weakening dollar. Gross dollar volume rose 13% in local currency, suggesting Mastercard’s take rate remains intact. The one concern might be rising rebates and incentives (which are netted out from revenue rather than booked as an expense), but that figure has been rising for years as Mastercard battles both Visa and American Express Company (NYSE:AXP).
Expenses rose as well — but not quite as fast as revenue. As a result, operating margins continued to expand, rising 120 basis points. Adjusted EPS of $1.14 excludes a one-time hit from US corporate tax reform, and rose a whopping 33% year-over-year, beating estimates by $0.02.
Q4 wraps up a strong year for Mastercard, with revenue up 16% and adjusted EPS rising 21%.
And 2018 looks to be a good year too.
In the earnings presentation, Mastercard revised its three-year growth projections from 2016-2018 to “mid 20s” EPS gains. That in turn implies 2018 EPS around $6 per share, thanks in part due to tax reform — well above previous consensus of $5.54. Given the strength in the quarter, it’s a wonder the gains in Mastercard stock haven’t been bigger.
The Concerns About MA Stock
As strong as the quarter looks, there is an argument that even impressive results are priced into Mastercard stock. MA now trades at a whopping 38x 2017 EPS, and in the range of 30x 2018 figures. That’s higher multiple than V stock, and a huge premium compared to AXP.
And there alternatives in the space. JPMorgan Chase & Co. (NYSE:JPM) trades at less than half that P/E ratio despite strong credit card performance of its own. Square Inc (NYSE:SQ) and Shopify Inc (US) (NYSE:SHOP) offer more direct exposure to e-commerce growth, albeit at much higher near-term valuations.
Fundamentally, the key concern with Mastercard is just how much margin expansion really is left. Adjusted operating margins for the year were an incredible 54.4%, actually down 10 bps year-over-year. If revenue growth moderates, and margin expansion slows, EPS growth drops down to the low double-digits or even high single-digits after 2018.
So there are some concerns here. How much upside is really left remains question mark (though that’s been the case with so many high-quality stocks for years now, it seems). I personally like the case for SHOP, itself an expensive stock.
The Bottom Line For MA Stock
MA still seems to have a nice bull case, even at these levels. It’s going to grow for years to come, and it’s executing effectively. International growth represents another driver. Plus, a weaker dollar could add a tailwind as well.
A few more earnings beats as 2018 plays out and MA could threaten $200, with the same ~30x multiple to EPS in the low $6 range.
This simply is a really good business; there’s a reason why MA and V have been steady outperformers for years now. With their duopoly intact, and no reason to see any danger lurking for MA stock, there’s little reason to think that will change.
As of this writing, Vince Martin has no positions in any securities mentioned.
