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Wow, what a run. As one looks at the market today, you can't help but see any number of stocks at or near their fifty-two week highs. While many traders and investors have missed this rally, and some are still looking to short, most market participants would agree that it is getting increasingly harder to find value in the market. With many stocks up 30% or more in the last five months alone, it's hard to find stocks that likely have significant near-term upside.

In this environment, with most stock prices reflecting the improving macro-economic environment, I think you have look at companies that offer above average growth prospects. While many growth and momentum names like Apple have had monster runs, I think the question now should be about value. Some companies like Apple (AAPL), Baidu (BIDU), and others will always generate enough attention to continue to move higher if the news is positive. Long-term though, valuation is often more important than momentum. Stocks that have had big runs may continue to move higher, but the market will likely pay closer attention to valuations as stocks continue to hit new highs.

As Warren Buffett likes to say, the market votes in the short-term, but weighs in the long-term. Given how far a number of stocks dropped prior to the recent rally, I still believe that value still exists in the market. Today I think the best value in the market is in the finance sector. In particular, I like the credit card issuers. To me MasterCard (MA) offers the best value and strongest future growth prospects of any name within this sector.

At first look, MasterCard has had a monster run. The 1 year chart shows that shares have more than doubled over the last year.

However, when you look at the 5 year chart you can see that MasterCard has really not moved up that much on an annual basis since 2008.

MasterCard shares bottomed at around $150 a share around March of 2009, after the broad market sell-off. Shares of this company also sold off again at the beginning of 2010 on the uncertainty surrounding how the new Dodd-Frank legislation might impact their debt and credit business within the U.S. Today, MasterCard currently trades around $400 a share. If you look at the 5 year chart, you can see that MasterCard has really only gone up about 10% a year, to get to $400 from the $300 level it reached in 2008.

While obviously consumer spending levels were higher in 2008 than they are today, MasterCard issues and process cards; it takes no credit risk. Also, the company was not hit very hard by the consumer protection provisions of Dodd-Frank that gave the federal reserve significant authority to curtail debit and credit card fees that comprise a significant portion Visa's (V) and MasterCard's revenues. The federal reserves limit on fees that these companies can charge was much higher than what most analysts expected, and these companies have really rallied pretty consistently since this decision was viewed as regulators taking a more pro-industry stance.

Still, MasterCard has seen its shares double in the past year, so it is worth asking if there is value investing in a company whose share prices are up over 100% in such a short-period of time? I think you can, and to me the value today in MasterCard is all about the company's business model, and how it is distinct from other retail and finance companies, as well as MasterCard's larger peer, Visa.

While Visa has very large exposure to the U.S. debit market, which relies mostly on small businesses to pay their fees, MasterCard is more levered to credit card fees, and the company gets more of its revenues from international markets. MasterCard is also much smaller than Visa. Today, MasterCard's market capitalization is just about $50 billion, while Visa is nearly 60% bigger at around $80 billion.

Most of the financial regulation up to this point has been far less burdensome than some in the industry feared. The fees Visa and MasterCard charge to small businesses are the most susceptible to unfavorable future regulatory developments since they primarily affect middle to lower income businesses. Visa has significantly more exposure to this market than MasterCard.

So what else is so unique about MasterCard's business model? One distinct and very big advantage that MasterCard and Visa have over nearly every other retail or financial name you can think of is huge free cash flow. While the retail industry is traditionally a capital intensive business, MasterCard has few significant annual expenses. The company currently has $5 billion, or 40 dollars per share in cash, and no debt. Also, just this past year, the company generated nearly $3 billion in free cash from its increasing annual revenue that has grown at 15-20% each of the last several years.

Given the strength of MasterCard's balance sheet and its significant and growing free cash flow, the company will likely enact a robust buyback program and raise its dividend sooner rather than later. MasterCard's borrowing rate should also be very low for years to come. The company has already enacted a significant buyback program from several years ago, and I would expect management to only continue if not increase efforts like these.

Also, despite the company's significant exposure to Europe and the weak state of the U.S. consumer, MasterCard has still been able to show year-over-year EPS and revenue growth of 18-22% each of the last several years. Given that about 20% of the company's revenue is free cash flow, it seems more than reasonable to think this high growth name with little real competition outside of Visa would justify a growth multiple of around 18-22x an average estimate of next years earnings.

And here, again, with estimates rising significantly just in the last couple days, analysts seem behind the news. The average estimate for next year's earnings is now at roughly 26 dollars per share. That means MasterCard is currently trading at roughly 15x next years average earnings estimate despite having a 15-20% growth rate and nearly 40 dollars per share in cash.

If we conservatively value MasterCard at 20-22x next years average earnings estimates, giving the company a small premium for the huge free cash flow it generates, we get a stock price of between 520-570 dollars a share. Most analysts have moved their revenue estimates up as well, and further upwards revisions are likely.

To conclude, while companies like Apple, Bank of America (BAC) and Citigroup (C), continue to get all the attention, the best stocks to trade or invest in may be elsewhere. While MasterCard is not under the radar, this company has not gotten the attention of other bigger names in stronger performing sectors like the technology sector. Today, consumers are increasingly switching to plastic and most financial regulatory fears are concerns of the past. With consumer spending likely to increase over the coming years and the move to plastic accelerating, MasterCard should have years of strong growth ahead.

Source: MasterCard Deserves More Credit From The Market