MasterCard Has Great Potential Beyond 2013

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 |  About: MasterCard Incorporated (MA)
by: Alex Cho

Introduction

MasterCard (NYSE:MA) is a credit card services provider, it provides the second largest payment system in the world. MasterCard has been on a continuous up-trend but I feel that the upside is limited over the next year, however, MasterCard is a great growth investment. Over the long-term MasterCard will generate returns that exceed the S&P 500.

Qualitative Analysis

MasterCard earns a small percentage on the transactional value of every debit or credit card transaction that takes places through its network. MasterCard avoids liability from loan losses, rather, it is the responsibility of the financial institutions who issue MasterCards that take on the risk of default from lending cash.

MasterCard is an intermediary taking on very little risk. Businesses that are a part of the MasterCard network have to pay a small fee in order to be a part of the network. Every time a consumer spends money with a MasterCard, MasterCard receives a percentage of the transaction from the business. Businesses pay MasterCard directly. Businesses benefit through a reduction in fraud, and higher consumption. Thefts from employees who steal money from cash registers are averted through credit or debit card transactions. Online transactions are simplified and made possible because of debit and credit cards. Consumers also benefit from the convenience of being able to draw money directly from their bank accounts. MasterCard plays a useful role in the global market.

MasterCard continues to expand internationally adding further to its revenue and net income growth. This growth is what is keeping investors on board.

Technical Analysis

MasterCard has been on a continuous up-trend. The stock is likely to pull-back to the bottom of the channel and find support at $470.00 - $475.00 per share. The stock is expensive at these levels, but shorting it would be folly. Buying the stock on pull-backs seems to be the most practical investment strategy.

Click to enlarge

Source: Chart from freestockchart.com

MasterCard has been trading within the channel since June, and I don't anticipate this to change anytime soon. That being the case, slow and steady share appreciation seems to be the trend. The stock should not be bought at current levels, but going short is not likely to generate outstanding returns either. This implies that investors should be buying the stock on severe pull-backs. I will further clarify the investing strategy under the strategy section.

Notable support is 477, 460, and 400 per share.

Notable resistance is 495, 505, and 550 per share.

Street Assessment

Analysts on a consensus basis have strong expectations for the company going forward.

Growth Est

MA

Industry

Sector

S&P 500

Current Qtr.

19.40%

4298.50%

-93.80%

8.30%

Next Qtr.

16.20%

-8.90%

-92.70%

14.80%

This Year

17.50%

89.30%

23.80%

5.60%

Next Year

16.10%

19.50%

6.30%

13.20%

Past 5 Years (per annum)

30.89%

N/A

N/A

N/A

Next 5 Years (per annum)

18.57%

13.74%

10.60%

9.14%

Price/Earnings (avg. for comparison categories)

22.05

14.04

13.34

13.71

PEG Ratio (avg. for comparison categories)

1.19

-5.09

0.76

-0.01

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Source: Table and data from Yahoo Finance

The company shows reasonable growth as analysts on a consensus basis have a 5-year average growth rate forecast of 18.57% (based on the above table).

Earnings History

11-Dec

12-Mar

12-Jun

12-Sep

EPS Est

3.91

5.3

5.57

5.92

EPS Actual

4.03

5.36

5.65

6.17

Difference

0.12

0.06

0.08

0.25

Surprise %

3.10%

1.10%

1.40%

4.20%

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Source: Table and data from Yahoo Finance

The average surprise percentage is 2.4% above analyst forecast earnings over the past four quarters (based on the above table).

Forecast and History

Year

Basic EPS

P/E Multiple

2007

$ 7.98

26.60

2008

$ (1.94)

-

2009

$ 11.19

22.71

2010

$ 14.10

15.82

2011

$ 14.90

25.75

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Source: Table created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

The EPS figure shows negative net income for 2008, this was because the company was adversely affected by a one-time litigation settlement.

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Source: Table created by Alex Cho, data from shareholder annual report

When ignoring the one-time litigation settlement we can conclude that MasterCard is non-cyclical. The largest risk factor for MasterCard is the slowing of economic growth and competition from competitors like: Visa (NYSE:V), American Express (NYSE:AXP), PayPal (NASDAQ:EBAY), and Discover Financial Services (NYSE:DFS).

Source: Forecast and table by Alex Cho

By 2017 I anticipate the company to generate $52.47 in earnings per share. This is because of earnings growth, an improving global outlook, and continued success of its product offerings. The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5 years.

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Source: Forecast and chart by Alex Cho

Investment Strategy

MA currently trades at 489.32. I have a price forecast of $424.24 for 2012, being that there are only 15 days before the end of 2012, the stock has already exceeded the price forecast by 65 dollars. This means we should move to the long run, and focus on 2013-2014. The price history indicates that MasterCard will gradually appreciate throughout the year. Its recent streak of surprising to the upside has slowed which implies limited upside surprises over the short-term; therefore, it seems more prudent to have a buy and hold mentality. This does not mean I recommend buying the stock today, but to wait before buying the stock.

Short Term

Over the next twelve months, the stock is likely to appreciate from $489.32 to $504.93 per share. This implies 3.1% upside from current levels. The technical analysis indicates a strong up-trend in the stock. However, just because the stock is in an up-trend does not mean investors should just buy the stock. Rather, investors should wait for a severe correction in price before buying the stock. For investors who require diversification, and are absolutely determined to buy MA, I recommend that investors be patient and buy the stock on pull-backs especially since the company has already priced in 2013 valuations. This means limited upside for investors over the short-term, but the long-term investment thesis remains strong in MasterCard.

Investors should buy MasterCard at $460 (when it declines) and sell at $505 to pocket short-term gains of 9.7%. The return on investment is unlikely to beat the Standard and Poor 500 in 2013, and this implies that investors are likely to find more compelling opportunities over the short-term in other equities. However, the bullish case remains strong over the long-term.

Long Term

The company is an exceptional investment. I anticipate MA to deliver upon the price and earnings forecast despite the risk factors. MA's primary upside catalyst is international growth, and margin improvement. I anticipate the company to deliver upon my forecasted price target of $1,013.24 by 2017. This implies a return of 107% by 2017. This rate of return is exceptional, considering MasterCard has a market capitalization of $60.8 billion. The large market capitalization allows for larger institutions to sell the stock without affecting liquidity, making it an investment of choice.

Conclusion

MasterCard is a great investment opportunity over the long-term. The stock is trading at valuations that far exceed the forecast for 2012, and is unlikely to trade at valuations higher than the 2013 forecast. This implies investors should look for longer-term appreciation rather than the typical buy and dump strategy short-term traders have. The conclusion though remains simple: buy MasterCard, but have a long-term investment horizon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.