Why MasterCard Is Still The Master Of Its Industry

| About: MasterCard Incorporated (MA)

MasterCard Inc. (NYSE:MA) is one of the main global credit card carriers that specialize in mobile and electronic payment processing. The firm competes against the likes of Visa Inc. (NYSE:V), Discover Financial Services (NYSE:DFS), and American Express Company (NYSE:AXP). MasterCard like its peers is basically an intermediary between consumers, financial institutions, and merchants. These firms make money basically by charging a fee to the bank that is issuing the card and swipe fees. Firms like American Express that also function as a bank can make money in three different ways.

1. The fee that is charged to the merchant for providing the consumer with the convenience of taking the credit card. This fee can vary a great deal ranging from 1% to 4% of the transaction cost.

2. Fees charged to the card holder. These can include the annual fees, over limit fees, and missed payment fees.

3. Interest is another major revenue generator. Interest is charged monthly to the card holder when a balance is carried from month to month.

When MasterCard reported a 4th quarter miss this past week the company's shares slid 5.2% to $75.68 per share. The firm reported that net income had risen 3% to $623 million, which translated to $0.57 per share. This report missed the $0.60 per share consensus estimate that analysts had hoped MasterCard would deliver. The main reason that was cited for the miss was an increase in expenses this past quarter as the company spent more on marketing and reinvesting in its people.

Compared to its peers MasterCard was the only one of the four major card companies to report a significant quarterly miss. Visa reported a profit increase of 8.8% to $1.41 billion. Discover reported an increase of 12% to $602 million. American Express did miss estimates by a penny, but the firm also doubled its profit on higher consumer spending, so the negative news was a bit muted.

Given that news it is easy to see why the market pushed MasterCard down on Friday. I view the recent turn down as an excellent buying opportunity and feel that MasterCard's quarter results really were not all that bad. Below are the main reasons why I am still very bullish on MasterCard and feel it should be bought on its recent price weakness.

1. Both MasterCard and Visa last month won approval to settle the ongoing litigation that the companies had been fixing card swipe fees for $5.7 billion. Removing this unknown from the equation is a big win and will allow the company to get back to focusing on growth.

2. MasterCard grew its net revenue by 12% this past quarter to $2.1 billion. MasterCard generates majority of its profits outside of the U.S., and this past quarter processed transactions having increased by 13% to $10.4 billion this quarter a big chunk of that was driven by the increases seen in cross-border spending volume, which increased 18%.

3. Full year EPS for MasterCard came in at $2.62 per share, this represented an 18.6% increase over the $2.21 that was generated in 2012. The firm also increased its operating margin to 55.1% up from the 53.5% the year prior.

4. MasterCard continues to return value to its shareholders through an increased dividend and share buyback plan. Back in December the firm announced that it would be increasing the quarterly dividend by 83% to $1.10 a share (pre-split price), while also increasing its share buy-back program by another $3.5 billion.

5. Fundamentally MasterCard is a rock solid company. The firm has no debt, generates free cash flow of almost $4 billion, currently has $6.3 billion in cash on the balance sheet, and sports a growth rate in the double digits.

All of these stats are very telling, but the real question is why should you buy MasterCard over Visa, Discover, or Berkshire Hathaway (NYSE:BRK.A) favorite American Express. Below I have created a chart that compares these four companies against one another with a ranking being provided for each metric that will help highlight why MasterCard is still in very solid footings compared to its peers and should not be underestimated.

Fundamental Metric

American Express




Cash on Hand

$19.0B - 4

$6.30B - 2

$11.73B - 3

$4.26B - 1


$7.56B - 4

$3.80B - 3

$2.41B - 1

$3.02B - 2

Forward P/E

14.05 - 3

24.33 - 1

9.79 - 4

20.77 - 2

Return on Equity

28.29% - 3

42.45% - 4

23.89% - 2

18.27% - 1

Profit Margin

17.36% - 1

37.30% - 3

30.22% - 2

42.28% - 4

Price to Book

4.86 - 3

12.12 - 1

2.39 - 4

5.24 - 2


1.38 - 2

1.71 - 1

1.17 - 4

1.34 - 3


2.89 - 1

0 - 4

1.90 - 2

0 - 4






** Scale is 1-4 with 4 being the highest score possible

Based on the rating above Discover is the best all-around company given that all metrics are rated equally. I did not apply any weight to these metrics because that weight would be based on my own investment preference and I didn't want to blow up the comments section of this article about how my weighting is wrong, so I will leave that up to you.

If I were to apply a weighting the three metrics that I would put the most weight on would be profit margin, return on equity, and free cash flow. Since in my investing style that is where I like to focus my attention. When examining these three metrics my scoring would have generated the following:

· American Express - 8

· MasterCard - 10

· Discover - 5

· Visa - 7

Based on that scoring it is clear to see why I prefer MasterCard's fundamentals over those of the other three. Additionally, given the reasons that I highlighted above on the company's performance and the strong growth projections that management provided I think that this current hick-up in pricing is a gift and should be bought.

Disclosure: I am long MA. 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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