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Mastercard: Overpriced At Current Levels

Aug. 06, 2018 12:09 PM ETMastercard Incorporated (MA)27 Comments
Dalton Hicks profile picture
Dalton Hicks


  • Looking at Mastercard's 2Q18 success and evaluating why it's still not enough to justify current levels.
  • Evaluating the P/E ratio in comparison to its competitors and addressing concerns about its lack of sustainability.
  • Giving the company various price target valuations based on different market environments.
  • Looking into the value of the dividend.


I have been asked to write an analysis with a recommendation on Mastercard (NYSE:MA). I am a fan of banks and companies in the financial services sector; however, when it comes to Mastercard, I believe it is a little too pricey for my taste in retrospect to other companies in its sector. I am going to evaluate Mastercard's dividend, gross dollar volume (GDV), switched transactions, and credit card results to explain why, even though the results aren't bad, they aren't good enough to justify purchasing Mastercard at current market levels around $200 per share. I am going to outline why I believe Mastercard is worthy of investment at the right price, as well as why I believe its current market levels are above that price. I will outline one outlier in which I do believe MA could be worth purchasing at current market levels, however, that belief is only contingent on whether or not a said investor believes that the company will continue to trade at its above-sector-average P/E ratio. With that being said, my overall consensus on Mastercard is to hold it if you were lucky enough to get it at lower price levels, and to hold off purchasing at current levels.

Gross Dollar Volume

Mastercard did see impressive growth in gross dollar volume figures. I want to iterate again that the company is posting impressive results, but when translated to forecasted earnings down the road when compared to sector P/E ratio averages, I don't see a lot of potential for the return I'd like to see in association with the way I value companies. With that being said, Mastercard has posted 9% growth in GDV in the United States, 16% growth in the rest of the world, and worldwide growth of 14% holistically. Double-digit global GDV growth is quite impressive for a company of Mastercard's size in its

This article was written by

Dalton Hicks profile picture
My investment analysis is focused on identifying well-established companies trading appreciably under intrinsic value. I believe in deep value, long-term investments. My objective is to generate exceptional returns from well-known, less volatile blue chips. I am a mortgage loan officer, and the head of a limited investment partnership. I hope my contributions and analysis can provide valuable insight to fellow investors.

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

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (27)

For long term investors, ROIC tells you more about future returns than PE multiples. MA continues to demonstrate accelerating ROIC. In other words, it is becoming more efficient with each dollar of capital invested. As long as ROIC continues to increase, MA will be a compounding machine.
MA still has room to run ... it is not over yet.
William Darusmont profile picture
I think some comparison should have been made with V and AXP, even though the latter is clearly out of the picture. V on the other hand could be the superior investment going forward as it is making gains on MA which surged ahead but is now slowing. That is not to say both are not good investments, just that V should not be ignored.
cn_habs profile picture
V has beat earnings too so why did MA get ahead lately?
Faster overall growth, some acquisitions in the technology liked by the Street more than Visa's. So I was told...
Fwd pe is 26, ma has been consistently beating earnings. Wouldn’t say it’s crazy expensive. Dividend could do with a substantial increase though 25-30% would be nice as they haven’t really spent their tax cut.
recently sold Jan $220 calls for $7 and can
1)buy back today for~ $5.and thereby supplement the miniscule dividend by $2.00
2)wait and collect Aug,Nov. and Jan dividends (25 cents each) if past hist holds.
3)and maybe get called Jan18/19 at the $220
If called, look for next venture or if not called then wash and repeat.
MA is not the only solid company on the big board,
If called before assignment date the worst is I lose a dividend or two but I have my capital back early,although maybe unfortunately in this tax year.
I would also like to add that the P/E ratio that you’re assuming is very low for MA. In the last 5 years, the lowest P/e is 24.40 back in June 2014. While I’ll give you that there has been expansion recently, p/e has hovered around 26-30. It would seem unreasonable for p/e to break such a trend when earnings are still increasing at such a rate. ( a rate better than V) I think I’ll keep my shares and stay bullish on this company.
GreenPirate profile picture
Operating Margin 51.77%
EBITDA Margin 59.58%
Net Profit Margin 39.38%
Earnings Per Share 5.191
Sales 22.2
Dividend (MRQ) 15.8
Price to earnings, 38.76x
Return on Assets 25.97%
Return on Equity 98.93%
Return on Inves. Capital 43.81%
Operating Margin 51.77%
EBITDA Margin 59.58%
Net Profit Margin 39.38%
Analysts... all say BUY.

See any problems?
Gio Graves profile picture
"Analysts... all say BUY.

That's the only fly in the ointment if you ask me. It's nice to have some bears you can convert to bulls for the incremental buyer.
William Darusmont profile picture
Not me and I will add:
Forward P/E 31.6x vs current 39x
P/E to Growth Rate (PEG): 1.73x
and Beta 1.18
Note that these are very similar to Visa (V)
Gio Graves profile picture
SA never fails to disappoint. All valuation comes down to PE.

No, not margins (>40%!), not pricing power, not competitive landscape, not revenue growth, not TAM, not ROA

MA true peers ex. V are companies like GDOT, PYPL, GPN, FLT, EEFT, WU, SQ. Relative valuation is in-line in this cohort.
ChuckXX profile picture
Mastercard continues to be my 2nd largest holding right behind #1 Visa. Value Line which I have gotten for decades says best case scenario is in 2022-2023 it will trade around $235 a share. I have owned "MA" since the IPO in 2006 so I've done quite well with it. The longer you own and hold something the tougher it is to part with it. I have to admit that the PE is quite high and thats putting it mildly but I think I will stick with it and at $175 I will probably add more. I still think that "MA" over the next 5 to 7 years will continue to head North because there is so much potential out there for continued growth.
If you’re short MA, better get a shovel to dig yourself out of the grave
Much repetition. Nothing profound enough.
V and MA are not really comparable to AXP, DFS, or COF. V and MA are not banks, they do not loan money, therefore they do not carry the credit risk AXP, DFS, and COF are exposed to.

The business model of being able to skim a percentage of each transaction without carrying credit risk is why V and MA will always be valued higher than any of the companies you compared them to.
Over the year of buying. Not to think too much into micro manage the portfolio.
Buy one with high profit margin and/or some sort of monopoly and let's go.
Do not pick stock that have too many competition (ie retail, etc..)
In long term it will be fine. Such as MSFT, V, MA, AAPL, FB, AMZN, etc..
Do not worry about pricing in short term (ie. over price,...)

History tell me. It is doing fine.
flockof4 profile picture
V and MA are always expensive (ie: overpriced)...with good reason. Long both.
dhoadlab2 profile picture
My thoughts exactly!
Orangejulius profile picture
Rarely this expensive however. Check out the fastgraphs, they are trading on momentum without reason for this valuation. V is slightly less bad looking, but in the same boat.
Be careful when comparing multiples to those of competitors. MA is growing faster, has stronger networks and a more attractive business model than its competitors, although visa is close. I think MA is fairly valued based on my long term growth expectations (high for many years to come). Long MA and V
cn_habs profile picture
What are the EPS growth rates for each of V and MA? They seem almost identical on FASTGRAPHS yet MA is trading at a much higher multiple. Thanks
Orangejulius profile picture
Fastgraphs reveals details like these that really damn overpriced stocks. MSFT looks especially awful, with MA and many others following it up over the past year.

The momentum stocks took over and people forgot to look underneath their feet to see if they were walking on air. I can't help but suspect we will have a Wile E. Coyote moment in the next year.
Well, in the case of MSFT, I think it has a lot more to do with 2 things -- a complete change in business model to service and subscription based revenue streams which are inherently worth significantly more than one-offs of selling new software, as well as the explosive growth of Azure and O365. Oh, and the fact that a few years ago it was essentially left for dead as PC sales were declining, and now it is a growth powerhouse because of those 2 things I mentioned.

I'm not necessarily saying that MSFT isn't currently overvalued, but it IS definitely worthy of a much higher multiple than it was in the past. I don't know of anything substantial that has changed as far as MA is concerned to warrant a higher than historic multiple, but MSFT is a significantly different company than just a few years ago IMO
Wow. Thanks so much for this breakdown. Great stuff. Hope you do your syf follow up next
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