By Dee GIll
Up there in the thin air of a momentum market, where the likes of TripAdvisor (TRIP), Facebook (FB) and Tesla Motors (TSLA) fly, it’s shocking to find an old-school financial company, MasterCard (MA).
MA data by YCharts
MasterCard is hardly a baby. It’s a $96.28 billion market cap company well past an adolescent growth spurt. Yet its share price is up 64% this year, and investors now are paying almost as much on a forward price-to-sales basis for MasterCard shares as they do for some really popular newbies.
MA PS Ratio (Forward) data by YCharts
That’s a record-level sales valuation for MasterCard. Its forward PE ratio of about 31 is nearing record levels also.
MA PE Ratio (Forward) data by YCharts
What’s wrong with this picture? Is MasterCard in the wrong place? Or, could its market valuation be justified, and the only thing suspect about the situation is that it’s up there with stocks that trade on hype and hope?
First, MasterCard warrants a higher valuation than normally seen in huge companies, at least at the moment. MasterCard collects fees on credit card transaction instead of lending money. As YCharts wrote last February, that’s a booming business that MasterCard is well positioned to profit greatly from.
The company recently announced an 83% rise in its dividend (although it’s still a less than 1% dividend yield), a major stock buyback plan and a 10-for-1 stock split. Assuming MasterCard hits fourth quarter targets, revenues are forecast to grow about 12% next year and earnings about 18%. While there may be a case to be made for MasterCard shares as overvalued, there are a lot of reasons to like the shares.
Secondly, one needn’t worry that MasterCard reached this high valuation because all mega-caps are jacked up. Sure, shares of Visa (V) are also well up for similar reasons. But only a half dozen mega-cap stocks trade above MasterCard’s valuation. Setting the YCharts Stock Screener finds that almost half of the 64 mega-cap companies in the database trade at forward price-to-earnings ratios of less than 15, which has been a pretty average valuation for the market in recent years.
AAPL data by YCharts
On an historic basis, the S&P 500's average price to earnings ratio remains at a modest level.
S&P 500 Cyclically Adjusted Price-Earnings Ratio data by YCharts
That sharp rise at the end of the line above reminds us that it is, actually, prudent to worry about whether the stock market is entering dangerous bubble territory. But there are better ways to monitor this than tracking the gains of an individual share. YCharts outlined several stock market correction metrics worth watching in a piece earlier this month.