MasterCard: Trading At A Discount With Growth Drivers Ahead

| About: MasterCard Incorporated (MA)

With consumers steering away from cash in favor of the convenience of credit and debit cards, companies that offer these products are expected to see significant growth over the next few years. As the number of cashless transactions is increasing globally, year over year, MasterCard Inc. (NYSE:MA) is a global payments technology company set to capitalize on this growing trend.

MasterCard is a technology company and payments industry leader. Unlike American Express (NYSE:AXP) or the Discover card (NYSE:DFS), MasterCard Inc. does not issue cards, set cardholder fees, interest rates, or make loans to cardholders. Much like MasterCard's closest competitor Visa Inc. (NYSE:V), the cardholder relationship belongs to the company's network of financial institution clients and is managed by them. MasterCard derives revenues primarily from fees paid by these financial institutions based on payment amounts, transactions that MasterCard processes and other services that MasterCard provides.

Using the analysis below, I will analyze the past four years of MasterCard's performance. I will look at MasterCard's past profitability, debt and capital, and operating efficiency. Based on this information, we will look for strengths and weaknesses in the company's fundamentals. This should give us an understanding of how the company has fared over the past few years and will give us an idea of what to expect in the future.


Profitability is a class of financial metrics used to assess a business' ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net income, operating cash flow, return on assets and quality of earnings. From these four metrics, we will establish if the company is making money and gauge the quality of the reported profits.

  • Net income 2010 = $1.846 billion
  • Net income 2011 = $1.906 billion
  • Net income 2012 = $2.759 billion
  • Net income 2013 TTM = $2.991 billion

MA Net Income TTM Chart

MA Net Income TTM data by YCharts

Over the past three years MasterCard's net profits have increased from $1.846 billion in 2010, to $2.991 billion in 2013 TTM. This represents a 62.02% increase.

  • Operating income 2010 = $2.752 billion
  • Operating income 2011 = $2.713 billion
  • Operating income 2012 = $3.937 billion
  • Operating income 2013 TTM = $4.298 billion

Operating income is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past three years MasterCard's operating income has increased from $2.752 billion to $4.298 billion in 2013 TTM. This represents an increase of 64.03%.

ROA - Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."

  • Net income growth

    • Net income 2010 = $1.846 billion
    • Net income 2011 = $1.906 billion
    • Net income 2012 = $2.759 billion
    • Net income 2013 TTM = $2.991 billion
  • Total asset growth

    • Total assets 2010 = $8.837 billion.
    • Total assets 2011 = $10.693 billion.
    • Total assets 2012 = $12.462 billion.
    • Total assets 2013 TTM = $12.021 billion.
  • ROA - Return on assets

    • Return on assets 2010 = 20.89%.
    • Return on assets 2011 = 17.82%
    • Return on assets 2012 = 22.14%.
    • Return on assets 2013 TTM = 24.88%

Over the past three years MasterCard's ROA has increased from 20.89% in 2010 to 24.88% in 2013 TTM. This indicates that the company is generating significantly more income on its assets than it did in 2010.

ROE - Return on Equity = Net Income / Shareholders' Equity

As shareholders' equity is measured as a firm's total assets minus its total liabilities, ROE reveals the amount of net income returned as a percentage of shareholders' equity. The return on equity measures a company's profitability by revealing how much profit it generates with the amount shareholders have invested.

  • 2010 - $1.846 billion / $5.205 billion = 35.46%
  • 2011 - $$1.906 billion / $5.868 billion = 32.48%
  • 2012 - $2.759 billion / $6.917 billion = 39.89%
  • 2013 TTM - $2.991 billion / $7.018 billion = 42.62%

Much like the ROA, the ROE is showing increasing profitability. Since 2010 the ROE has increased from 35.46% to 42.62%. As the ROE has increased over the past four years, this reveals that there has been an increase in how much profit has been generated compared to the amount that shareholders have invested, thus indicating an increase in shareholder value.

Quality Of Earnings

Quality of earnings is the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. To ensure there are no artificial profits being processed, the operating cash flow must exceed the net income.


  • Operating income 2010 = $2.752 billion
  • Net income 2010 = $1.846 billion


  • Operating income 2011 = $2.713 billion
  • Net income 2011 = $1.906 billion


  • Operating income 2012 = $3.937 billion
  • Net income 2012 = $2.759 billion

2013 TTM

  • Operating income 2013 TTM = $4.298 billion
  • Net income 2013 TTM = $2.991 billion

Over the past three and a half years, the operating income has been higher than the net income in all years. This indicates that MasterCard is not artificially creating profits by accounting anomalies such as inflation of inventory.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total assets

    • Total assets 2010 = $8.837 billion.
    • Total assets 2011 = $10.693 billion.
    • Total assets 2012 = $12.462 billion.
    • Total assets 2013 TTM = $12.021 billion.
    • Equals an increase of $3.184 billion
  • Total liabilities

    • Total liabilities 2010 = $3.632 billion.
    • Total liabilities 2011 = $4.825 billion.
    • Total liabilities 2012 = $5.545 billion.
    • Total liabilities 2013 TTM = $5.003 billion.
    • Equals an increase of $1.371 billion

Over the past three and a half years, MasterCard's total assets have increased by $3.184 billion, while the total liabilities have increased by $1.371 billion. This indicates that the company's assets have increased more than the liabilities thus adding shareholder value.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current assets / Current liabilities

  • Current assets

    • Current assets 2010 = $6.454 billion
    • Current assets 2011 = $7.741 billion.
    • Current assets 2012 = $9.357 billion
    • Current assets 2013 TTM = $8.962 billion
  • Current liabilities

    • Current liabilities 2010 = $3.143 billion
    • Current liabilities 2011 = $4.217 billion
    • Current liabilities 2012 = $4.906 billion
    • Current liabilities 2013 TTM = $4.327 billion
  • Current ratio 2010 = 2.05
  • Current ratio 2011 = 1.84
  • Current ratio 2012 = 1.91
  • Current ratio 2013 TTM = 2.07

Over the past three and a half years, MasterCard's current ratio has dipped but also returned to its 2010 level. As the most recent current ratio is well above 1, this indicates that MasterCard would be able to pay off its obligations if they came due at this point.

Common Shares Outstanding

  • 2010 shares outstanding = 130.90 million.
  • 2011 shares outstanding = 126.86 million.
  • 2012 shares outstanding = 123.24 million
  • 2013 TTM shares outstanding = 120.62 million

Over the past three and a half years, the number of company shares have decreased. Since 2010 the amount of common shares have decreased from 130.90 million to 120.62 million.

MA Shares Outstanding Chart

MA Shares Outstanding data by YCharts

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2010 = $5.539 billion
    • Revenue 2011 = $6.714 billion
    • Revenue 2012 = $7.391 billion
    • Revenue 2013 TTM = $7.815 billion
    • Equals an increase of 41.09%.
  • Total Asset growth

    • Total assets 2010 = $8.837 billion.
    • Total assets 2011 = $10.693 billion.
    • Total assets 2012 = $12.462 billion.
    • Total assets 2013 TTM = $12.021 billion.
    • Equals an increase of 36.03%.

Over the past three and a half years the revenue growth has increased by 41.09% while the assets have increased by 36.03%. This is an indication that the company from a percentage point of view has been more efficient at generating revenue.

Based on the information above we can see that MasterCard has produced very strong results from a fundamental point of view. Revenues over the past three and a half years, have increased by 62.02%, the ROA and ROE have both been indicating an increase in profitability, while the increase in assets has significantly outnumbered the increase in liabilities. The company's share buyback program is also creating shareholder value as the number of shares outstanding has decreased significantly over the past few years. Based on the results above we can see that the company has produced exceptional results in spite of some setbacks.

Looking Forward

Looking forward, MasterCard is anticipating many opportunities for growth over the next few years. Over the next three years MasterCard is anticipating strong global, industry and market growth. Year over year, MasterCard is anticipating personal consumption expenditures (CPE) to increase by around 5% YOY. This coupled with global secular trends and increased market opportunities through expansion in emerging markets means MasterCard is anticipating revenue growth 11% - 14% CAGR.

With the expected growth in revenue and the company's plan to keep operating margins at a level of 50%, this translates into growth for the company's bottom line. The company anticipates a minimum of 20% GAGR in EPS growth over the next few years. This anticipated growth translates into EPS targets for FY 2014 being $29.32 and FY 2015 at $35.98.


In the section below, I will use a couple of different methods to find a valuation of the stock price. In this section, I will use the Discounted Cash Flow valuation model and forward P/E ratios to estimate the current value of each share.

I believe using the Discounted Cash Flow valuation model for MasterCard to be fair because DCF analysis can help one see where the company's value is coming from and one can generate an opinion based on that.

Even though there are variations in calculating this formula, this model is based off of a terminal value of $83.128 billion and a WACC of 5.93%. The terminal value $83.128 billion is based off of the company trading at 20X EBITDA. I have concluded MasterCard's value to be $688.24 per share.

In another method, I will use MasterCard's forward P/E ratios with estimated earnings to find the value. Currently, MasterCard has a forward P/E of 20.00 and FY 2015 earnings projected at $35.98. These two metrics lead to a target price of $719.00. I believe this to be a fair P/E ratio moving forward. As we look to be heading into a rising interest rate environment, P/E ratios tend to drop during this time. Even if I took 7% off an already fair forward P/E of 20.00 this would give the company a forward P/E of 18.6. A forward P/E of 18.6 would give the company a value of $669.23 per share.

As of October 2, MasterCard's stock was trading at $677.79. Using the Discount Cash Flow Formula, this indicates the stock is trading at a 1.54% discount to today's price. If I calculate a valuation using forward P/E ratios this indicates a valuation $719.00 or a discount of 4.47%.

Chart sourced by (Finviz)


At this point in the market, I believe if you added a 50% position here and waited for the overall market to bring the price down closer to the trendline, this would present and excellent opportunity to add positions in a company with excellent growth prospects and a great business model.


MasterCard's stock price has had an impressive run in 2013. Even though there is excellent growth potential with over 85% of the world still using cash and checks, I believe the stock is close to fairly valued at this point. If the market has a selloff and the stock price falls back to the trendline around the $640.00 range, this would provide an outstanding opportunity to invest in a company with a great business model, and excellent growth prospects. Having stated that, at this point in the market, based the Discount Cash Flow Formula, I have calculated that MasterCard is currently trading at a slight discount.

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.