MasterCard Stock Is A Buy, But Is It A Better Buy Than Its Card Peers?

Mastercard stock - MasterCard Stock Is A Buy, But Is It A Better Buy Than Its Card Peers?

Source: Håkan Dahlström via Flickr (Modified)

Mastercard‘s (NYSE:MA) battle with long-time archrival Visa (NYSE:V) continues, with a win in the bidding for fintech firm Transfast. Coming in the wake of losing out in an effort to purchase a similar company, cross-border payments network provider Earthport, MA stock investors can be confident the payments processor is doing all it can to remain competitive.

Both Mastercard and Visa have seen their stocks rise as the world moves to cashless economies. With the evolution to digital money, the entire payments industry continues to benefit from double-digit profit growth.

At the same time, it makes a decision to invest in MA stock or V shares more than a simple buy-or-sell question. In this industry, investors should not ask if they should buy Mastercard stock; they should find out if it or one of its peers would bring more profit?

MasterCard Keeps Up Yet Falls Behind

With MasterCard buying Transfast and Visa presumably winning the bidding war to acquire Earthport, both firms get better access to bank accounts and ACH networks globally. Perhaps more importantly, both card processors expand their presence in peer-to-peer money transactions.

So, as the world more toward a cashless society, the MA-Visa rivalry gets more heated. In nearly all cases, most merchants accept both types of cards. Yes, Costco (NASDAQ:COST) only accepts Visa, but such exclusive instances are rare.

However, despite this parity, Visa dominates in terms of gross dollar volume, which covers all types of transactions. As of the third quarter of 2018, Visa controlled 61.5% of the market. This compares to only 25.2% for MA, and 11.1% for American Express (NYSE:AXP).

Mastercard Benefits From Fintech Growth

However, where Mastercard lags in credit cards, it has compensated with its moves into debit cards and e-commerce. Thankfully for Mastercard stock bulls, these areas will see the most near-term growth in the fintech space.

The benefit — and the problem — with this fintech sector is that every equity in the industry would probably bring profits. Even Discover Financial (NYSE:DFS), which holds only 2.2% of the market, should see double-digit profit growth this year. One could make an argument that MA stock would deliver higher returns than Discover. However, whether it can outperform its other peers is the bigger question.

Should I Buy MA Stock?

The MA stock price hovers near its 52-week high of about $228 per share. Still, it struggles to stand out even as it posts stellar numbers. In both profit and valuation, Mastercard and Visa appear similar. Mastercard stock analysts forecast profit increases of 16.3% this year and 18.4% in 2020. This barely exceeds the 15.4% rate for 2019 and 15.8% 2020 growth predicted for Visa. Moreover, the forward price-to-earnings (PE) ratio slightly exceeds that of Visa, 25.5 vs. 24.8.

I like Mastercard stock better now than last year when I panned it for its high multiple and lower profit growth. Achieving near parity with Visa has changed the value proposition. However, it has not made MA stock more of a bargain than Visa.

Moreover, if we evaluate these stocks purely on valuation, both American Express and Discover trade at single-digit PE ratios. Both have grown profits more slowly than Mastercard. However, with American Express set to overtake Mastercard as the second-largest processor of credit cards, AXP stock could become the equity of choice in this space.

Bottom Line on Mastercard Stock

Although Mastercard stock remains a buy, the fintech sector appears to offer better options. The purchase of Transfast should enhance Mastercard’s ability to conduct transactions. However, it continues to struggle to differentiate itself from Visa even as Visa achieves increasing dominance with credit card transactions.

MA stock will continue to benefit from double-digit profit growth for the foreseeable future. Also, even though its 25.5 PE ratio exceeds its peers, most analysts would not call Mastercard stock “overpriced.” Still, for investors who intend to pursue a higher return, they might see a larger profit by buying AXP stock.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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