Why I Like MasterCard

| About: MasterCard Incorporated (MA)

MasterCard Incorporated (NYSE:MA), a longstanding institution of the global electronic payments era, continues to revolutionize relationships between consumers, merchants, and financial institutions. Shares opened just below $380 levels in January of this year and closed last week just above $440. Here's why I like MasterCard as an equity investment.

With 6,700 employees, outstanding return on average equity (34.43% in 2011 and 44.7% in Q1 2012), very high return on average assets (19.5% in 2011 and 25.03% in Q1 2012), EBITD margin of 43.3%, operating margin of 40.41% in 2011 and a whopping 56.88% in the first quarter of 2012, and net profit of 28.36% in 2011 and 38.74% in Q1 2012, MasterCard's financial metrics speak for themselves in justifying this company as a solid, extremely stable revenue-generating business with positive free cash flow and high future earnings potential.

This year's 1Q EPS of $5.35 and net income of $682 million in the first quarter solidly beat earnings estimates from equity analysts across the board. Net revenue grew a satisfying 17%, operating margin stood at nearly 57%, and share repurchases are establishing strong support for the share price. Management has remained optimistic in its forecast for net revenue growth into future periods, and investors should have good reason to believe their estimates for net revenue growth CAGR of 12-14% for the 2012-2013 year and an EPS CAGR of > 20%.

Several equity analysts put the target price for equity shares of MA at over $550 within the next year; my internal DCF analysis with a bit more conservative assumptions firmly establishes a target price at just over $466 - still representing substantial upside from today's levels. For me, the most compelling metric is return on equity for MA; while the S&P 500 had a 1Q12 RoE of 14.55%, MA's RoE was 31.8%. Gross profit margin is at 60%, cash flow is incredibly strong, and the company is in a beautiful position as industry consolidation continues at a fast pace.

In fact, P/E of 27.73 demonstrates the extent to which the market believes in the earnings potential of MA equity shares; compared to peers such as Visa Inc (NYSE:V) with P/E of 29.25, Global Payments Inc. (NYSE:GPN) with P/E of 14.47, Fidelity National Information Services (NYSE:FIS) with P/E of 21.14, Discover Financial (NYSE:DFS) with P/E of 8.19, Wright Express Corp (WXS) with P/E of 16.73, and a whole host of others, MasterCard is right at the top when it comes to future earnings convictions among investors.

When it comes to earnings per share, though, MasterCard demonstrates why it is far and away the best global payments and technology company in which to invest today. EPS for MA is at $15.92; EPS for Visa Inc. is at a relatively paltry $4.28. DFS has an EPS of $4.31, Global Payments has an EPS of $3.02, and Wright Express has an EPS of $3.71. No other payments company comes close to MasterCard's levels of earnings per share, and that is a primary reason I am bullish on the equity shares of MA.

Detractors of such an argument may claim that EPS reality and potential have already been priced into MasterCard's equity share price, and that this is simply not a good time to invest in the company. While investors would certainly be wise to consider arguments in support of a bearish thesis on MasterCard, such as a continued global economic downturn, consumer privacy concerns among sector competitors, and increasing levels of scrutiny in the closely related financial sector, in my opinion the preponderance of the evidence is in favor of the bullish case.

Investors who still are not convinced may care to examine other peers such as Fiserv Inc (NASDAQ:FISV), Alliance Data Systems Corp (NYSE:ADS), Total System Services Inc (NYSE:TSS), Computer Sciences Corp (NYSE:CSC), Genpact Ltd (NYSE:G), Automatic Data Processing (NASDAQ:ADP), Paychex Inc (NASDAQ:PAYX), Cass Information Systems (NASDAQ:CASS), Euronet Worldwide (NASDAQ:EEFT), MoneyGram Intl (NYSE:MGI), and Western Union Co (NYSE:WU), and determine for themselves which organization has the strongest relative position in this growing sector.

On top of all of this, MasterCard is well known for having had one of the world's most recognizable advertisement campaigns. In that spirit, one equity share of this solid company with pristine ratios at market close on 7/6/2012 would have cost you $441.63. One January 2013 MA 450 call today would cost you $34.90. The premium on one weekly 440 put contract would garner you $4.75. Establishing a long position on MasterCard at current price levels, though, could indeed be a priceless opportunity.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MA over the next 72 hours.