Why MasterCard Is Worth $536 A Share And Looks Undervalued

Jul.15.12 | About: MasterCard Incorporated (MA)

MasterCard (MA) is a US listed business services and payment processing company. MasterCard is a constituent of the S&P 500 and has a market capitalization of $54 billion.

MasterCard had an impressive performance over the last 52 weeks: The stock is up 41%. YTD the shares gained over 15% already. MasterCard currently quotes about 8% below its 52 week high of $467 and investors are wondering whether it makes sense to buy the stock close to its 52 week high. Since I am normally attracted to 52 week lows, justifying an investment in MA might put some contrarians at unease. However, MasterCard and Visa (which I have also rated a Buy) have extraordinary key performance indicators and are given room to grow their valuations due to the $7.25 billion settlement with merchants over transaction fees. This agreement will have an uncertain margin and earnings impact, however, given the past earnings track record, I am treating the settlement as a one-off, non-recurring event, that is not affecting my core earnings estimates.

I estimate the company to earn about $26.80 per share in 2013 which is above analyst average 2013 EPS estimates of $26.07. As I have argued in my article about Visa (V), transaction processing companies operate in an oligopolistic arena and, hence, have high profitability measures. High capital expenditures are required to step foot into this industry, which act as an entry barrier allowing the existing companies to maximize their surplus. MasterCard's profitability is very attractive: The operating margin stands at 41%, the profit margin at 29% and the return on equity at 35%. Assigning a multiple of 20x forward earnings the fair value of MasterCard would be $536, which gives the stock 25% upside potential.

The technical chart pattern is less conclusive. The chart allows both for a short-term upward and downward sloping trend canal. If MA's share price can extend over $440, the short-term down-trending canal will be dominated by the short-term up-trending canal. In that case, the stock has an immediate potential to reach up to $485. Traders who engage based on charts, will probably find other investments more promising.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.