MasterCard IPO: The Company's an Unpredictable Behemoth (MA)

Story: Credit cards. You surely know who these guys are, and I have little to say about the sector overall -- just that the Japanese barely use them (credit cards), so there is plenty of international growth left even in some industrialized countries, and that the form factor (credit card) may have more options soon (key fobs, cell phones, etc).

Company: A huge ($2.5B) IPO. Will they be a Spectacular Story? It's hard to say, since on the one hand their products have been around for a long time (no big excitement), but on the other hand they have great name recognition.

Turning to their latest prospectus, we were surprised. We expected them to be Solid, but they are not.

They suffered from the loss of a lawsuit in 2003 and as a result had non-recurring payments between 2003 and 2005. We'll back those charges out, but all their other costs, for an old line company, are operational. So in this case, operating income is Net Income without the lawsuit charge. The surprise is just how inconsistent that has been. From 2001-2005 their FY operating income has varied Y/Y by -18%, 224%, -31% and 31% ($116M/$142M, $378M/$116M, $260M/$378M, $342M/$260M). For Q1 2006 they had Y/Y operating income growth of 36% ($127M/$93.2M).

They've been operating income profitable for every year from 2001-2005, but for 2006 will their operating income increase, decrease, or stay the same? We don't know, as their growth is not predictable. Blah, except for the name recognition.

Stock: MA is a very big offering, with good name recognition, and is likely to be properly valued. With the trailing 2005 operating earnings of $342M, and what they figure to be about 100M ($267M earnings/$2.67EPS) shares outstanding, that gives a trailing operating EPS of $3.42. They are shooting for a target price of $43/share, which would give them a trailing operating P/E of 13 ($43/$3.42).

That could probably expand a bit in the marketplace, so there may be some upside, but we expected MA to be a possible long term buy-and-hold candidate, which is it is not. They are just as likely to shrink in 2007 as they are to grow. We'll probably pass.

That means that of the three big offerings in the pipeline (BurgerKing, Vonage, and MasterCard), all of which have increased their offering size during or prior to their roadshow (from $400M to $500M, $250M to $530M, and $2.45B to $2.84B, respectively), we find none of them compelling, either due to truly atrocious finances (Vonage), a private-equity unsustainable quick flip (Burger King), or being an unpredictable behemoth (MasterCard).

Related: All IPO Analysis on Seeking Alpha