After predicting last November that MasterCard (NYSE:MA) would struggle when the stock was around $100, the current price action suggests the market is now more bullish regarding the payments network. The question though is whether the negative earnings trend has improved enough to warrant a bullish view.
At $92 and change, MasterCard trades near the levels of last year. If anything, the trends are even worse now. The market focuses on the shift towards digital payments, but some underlying pressures on the business model need more attention. The stock might go higher in the short term, but are the trends improving enough for a break above $100?
Attracting Negative Attention
The biggest problem with MasterCard long term that is generally ignored by the market is that the large margins of the industry are continuously attracting negative attention. If you are in retail, the financial sector, or in Silicon Valley, one of the biggest opportunities in the market is to capture a share of the expanding and profitable payments market.
The CEO made the perfect statement regarding the issue at the recent Barclays Payments Forum Broker Conference:
So if you go from the beginning of realizing that 85% [of payments] is still cash why would I try to harvest the company for its margins when it's already making 50% and the higher you get those margins to go, the more some [indiscernible] silicon valley wants to come and try and play with your space and more regulators wants to come in and [indiscernible] and the more regulators want to change the margin profile for you, why do you want to attract negative attention to your industry.
While the CEO is smart to realize the competitive landscape, MasterCard is still talking about 50% operating margins. The difference between capping them at this level or attempting to push them higher is probably marginal to the competitive landscape.
The bigger issue is that digital currencies and alternative payment methods continue exploring ways to take away business from Visa (NYSE:V) and MasterCard, while merchants are continuously becoming payments network brand agnostic in a pursuit of the best deal.
Negative Earnings Trend
When a stock trades over $92 and only expects earnings to reach around $3.50 this year, one would expect an upward trend. In reality though, expectations for 2016 and 2017 continue to collapse.
My previous article highlighted how EPS expectations for 2016 had already declined from around $4.15 to only $3.91 in early November. Now the EPS expectation for this year is already down to $3.53.
Source: Yahoo Finance
The amazing part is that the company actually expects strong EPS growth year from the pro forma EPS of $3.12 earned last year. When excluding the positive tax settlements from last year and other one-time charges, MasterCard only produced the much smaller number than the ones reported by the media.
With higher rebates and incentives and a competitive environment for new co-brand deals, the targeted EPS growth of 13% seems awfully high. Even at that growth, the stock trades at 2x the growth rate.
The global trend from cash to electronic payment methods is a powerful one. At this point and based on the margins and size of MasterCard, the better option is to find a company that is better positioned to benefit from the growth opportunity. The stock likely heads higher in the short term, but the numbers don't suggest the stock breaks out to new highs.
Disclosure: I/we 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.
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