Mastercard (NYSE: MA) will be releasing earnings this Friday before the market opens and the average analyst estimate is that the company will record earnings of 68 cents per share for the quarter.
The stock has been dragged down with the market lately and is off circa 15% from its all time highs. I am not a fan of taking positions in high growth stocks just ahead of earnings, but unless the company severely disappoints this is the best moment to buy the stock in quite some time. The stock is trading at just under 20x forward earnings which is pretty cheap for a stock with a rock solid competitive position and expected to grow earnings around 18% per annum over the next five years.
When scrutinizing the earnings release, investors should pay particular attention to the issue of rebates to customers which have been marching higher in recent quarters. If the tendency accelerates, it could be a sign of a weakening competitive position which may limit the stock's potential long term. Other than that, there are plenty of reasons to love this stock.
The move to a cashless society is still in its infancy, particularly in the developing world. The growth potential is huge and, in this regard, Mastercard is more favorably positioned than Visa (NYSE:V) because of its greater exposure to emerging markets.
Second, the payment processing networks business is an oligopolistic market with limited competition, which is exactly where you want to be as an investor. There is no use in being in a high growth market if the benefits of such growth accrue to others. The network effects in this business are very strong which means that, failing dramatic business disruption, the company's competitive position tends to grow stronger over time as it adds more and more users.
On the issue of business disruption, some investors have been worrying about the impact of online and mobile payments on Mastercard's business. Paypal (NASDAQ:PYPL) has entered this segment in a big way and neither Mastercard nor Visa have thus far managed to stem the former's advances. These concerns are, however, probably misguided and, if anything, the development of mobile payments will only increase the transaction volume processed by Mastercard and Visa. Apple (NASDAQ:AAPL), for example, has opted to co-operate with networks and others will likely follow suit considering the difficulty for a newcomer to navigate the highly regulated market for payments.
Finally, investors are currently concerned about the slowdown in China and its repercussions on any business which has exposure to the country. In this regard, it should be noted that not only Mastercard's current presence in China is incipient, but also that that is not about to significantly change anytime soon in spite of the progressive opening of the market. Thus, even if the worst fears regarding China materialize - and there is no undisputed evidence of that so far - that would not make a material dent in the enormous growth prospects for the company globally. Significant spill-over effects from China's condition to neighboring countries in Asia would be a different story, but at this point such possibility is no more than mere speculation.
The market has lately been the rockiest in the last few years. The Fed has probably been too late in raising rates and has finally done so precisely at a time when global growth may be slowing. I am in the camp of those who think that QE4 is more likely than having four rate rises in 2016, but that question will not be settled shortly. On the other hand, the situation in the oil market will likely get worse before it gets better and we may have to test $20 before going up to a more sustainable $50-60 level. Thus, 2016 has every chance of being the most volatile year in the stock market since 2011 when the debt ceiling debate and the unfolding of the Euro crisis led to a bear market on the S&P.
But as Warren Buffett famously said, there is always something to worry about in the market. Times are dangerous and you may not want to go all in. Wait for the earnings release on Friday and if you see no red flags in the report, particularly as far as rebates are concerned, ease your way into this wonderful stock over the next few weeks and months. Mastercard is one of those stocks that could appreciate tenfold or more over the next twenty years and you will want to be one of those happy holders.
Disclosure: I am/we are long MA.
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.