You Can Do Way Better Than MasterCard Inc Stock in the Card Sector

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MasterCard stock - You Can Do Way Better Than MasterCard Inc Stock in the Card Sector

Source: Håkan Dahlström via Flickr (Modified)

Mastercard Inc (NYSE:MA) surged in early trading following its Q1 earnings report. Both revenue and earnings beat analyst estimates. The company also upped guidance on its 2018 revenues. This bodes well for MasterCard stock and the industry as a whole as modern societies use cash less often.

However, regarding how well MasterCard could perform against its peers remains more in doubt. With a higher valuation and a lower market share than its arch rival, investors might have better profit potential in a different credit card company.

MasterCard Stock Beat on Earnings

MA reported earnings per share (EPS) for Q1 of $1.50. This comes in 26 cents of Wall Street estimates. It also comes in well ahead of last year’s Q1 earnings of $1.01 per share. Revenues also beat expectations as the company brought in $3.58 billion on the top line. This represents a 31.1% jump over year-ago levels. Moreover, it beat estimates by $330 million.

However, what made the stock surge in morning trading was guidance for 2018. Revenue growth, which analysts had previously believed would come in in the high-single-digits, now looks poised to grow to low-double-digit levels.

Investors should also note that overseas transactions saw strong growth. The company increased its non-U.S. transaction volume grow by almost 32% over the last year. As the world turns increasingly away from cash, this will likely mean double-digit profit growth for MasterCard stock for the foreseeable future.

MasterCard Stock Holds up

This comes as good news to Mastercard, which has seen declines in the face of competition, mainly from arch rival Visa Inc (NYSE:V). However, MasterCard has gained market share from Visa in the area of debit cards. Both are also making gains on its smaller rivals Discover Financial Services (NYSE:DFS) and American Express Company (NYSE:AXP).

AXP remains a significant holding in Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B). However, it should be noted that Berkshire also holds more modest positions in V and MA stock.

Buffett’s investment in three of the four major credit card companies speaks to his confidence in this sector. I believe he has made the right call.

With society becoming increasingly cashless and companies such as Square Inc (NYSE:SQ) and Paypal Holdings Inc (NASDAQ:PYPL) furthering the use of credit cards, all four companies stand to benefit as reliance on cards continues to increase.

MasterCard’s peers all trade at lower multiples

However, regarding which credit card company makes a better investment, MA stock lags. MasterCard stock has more than doubled in value over the last two years. Its price-to-earnings (PE) ratio has risen to 49, by far the highest in this industry. Though massive profit increases would take the forward PE to 30, the stock remains expensive.

One can argue that AXP should trade at a lower multiple with lower market share and profit margins. However, Visa has grown into the market leader, earns larger profit margins, and trades at a 32 PE.

Choosing MA stock means paying more for lower performance. Given the profit growth involved, I doubt an MA stock investor would lose money. Still, I think V stock will come out as the more profitable investment in the end.

Final thoughts on MA stock

The price of MA stock surged on better than expected earnings in a hot industry. However, valuation and growth may not make MasterCard stock the best among its peers. MA stock moved higher as the company beat earnings and revenue estimates.

However, a surge in the stock’s value over the last two years has taken the PE ratio to the highest levels in its industry. Given the massive growth in the industry, MasterCard will remain a profitable, long-term play.

However, for investors who want to earn higher profits at a lower price, V stock and possibly AXP stock appear to be better choices.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2018/05/mastercard-stock-card-sector/.

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