Buy MasterCard On Analyst Upgrade, Positive Guidance And Long-Term Growth Potential

Sep.24.12 | About: MasterCard Incorporated (MA)

MasterCard (NYSE:MA) is one of our most favored stocks, and we recommend investors who are willing to play the secular shift in the Global Payments Industry to go long the stock. The company has recently been upgraded by Citigroup (NYSE:C) on its long term growth potential. The management, in its guidance for the second half of the current year, also presented impressive growth figures for the long-term, once the economy stabilizes. Also, the company has strong financial strength and attractive valuations.

Rating Upgrade

As noted in an earlier report, the Global Payments Industry has witnessed tremendous changes in the past decade or so. From a cash and check-based payment system, consumers moved to a more convenient magnetic strip card-based payment system. We believe that in the coming years, these magnetic strip-based payments will erode, causing payments through mobile and contactless payments to dominate. We believe that MasterCard, considered to be the world's second largest card network company with a market share of 33.3%, is set to ride the secular shift in the Global Payments Industry. Supporting our belief, Citigroup upgraded its ratings for the company. The news of an upgrade also boosted the company's share price by 1.3%. Citigroup upgraded the ratings from Neutral to Buy, giving a price target of $525. This is against the consensus price target of $491.52.

Citigroup believes the company has tremendous potential for long term bottom line growth of 20%. The bank further believes that the company will benefit from a supportive regulatory environment and rising equity markets. Despite the headwinds from Europe, MasterCard's international business is expected to remain on track.

2H2012 Guidance

The management at MasterCard released its guidance for the second half of the current year. Amidst the general global macroeconomic headwinds and the volatility in credit quality, management puts its top line growth under 13%. Alongside the growth in the top line, management also expects an increasing trend in operating costs. In the long-term, when the economy has stabilized, the management expects a bottom line growth of at least 20%.

Financial Strength

The company's financial strength can be seen in its strong operating cash flow generation, despite the economic turmoil. The company has an operating cash flow yield of 5%, which is the same as that of Visa (NYSE:V). Visa is considered to be the market leader in card network companies.

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The graph above demonstrates the upward trend in the historical and expected turnover, operating profits, earnings, net margin and operating margin.


In order to ride the secular shift in the Payments Industry, the management at MasterCard has shown a continuous resolve to innovate its payments systems. In line with this resolve, the company recently announced its PayPass Walled Services. This new digital wallet platform, which supports Near Field Technology ((NYSEMKT:NFC)), has already attracted collaboration intentions from as much as 18 banks and other financial institutions. This new platform will enable the company to process billions of transactions in the coming future.


The company's stock is attractively valued when compared to its peers in the Global Payments Industry. Visa, which is considered to have the largest card network, trades at a forward P/E multiple of 19 times, while MA trades at P/E of 18 times. Analysts have a consensus mean price target of $491.52 for MA, while the bullish price target is $566. At the current price of $459.52, the consensus mean price target provides an upside of 7%.

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

Business relationship disclosure: The article has been written by Qineqt's Financials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.