Mastercard: When Growth Beats Value

Apr. 01, 2019 9:53 AM ETMastercard Incorporated (MA)64 Comments
Librarian Capital profile picture
Librarian Capital
7.77K Followers

Summary

  • MA shares are an example of how growth can beat value, returning 2.9x over the last 5 years even after starting with a 33x P/E.
  • With EPS growth set to continue at 15%+ over at least the medium term, MA would return 9%+ a year even if its P/E were to fall to 26x.
  • We are confident in MA growing EPS at 15%, based on its strong track record, large existing and newer markets, and competitive offering.
  • Even if growth were to slow, MA could protect its earnings by reducing its expenses after years of increasing investments.
  • At $235.45, annual returns should range between 9% and high teens for the next 5 years. We recommend Buy, but leaving some room for further opportunistic purchases.

Introduction

Mastercard (NYSE:MA) shares are heading towards a new 52-week high, continuing a multi-year compounding journey, which has generated a 2.9x return in the last 5 years (since the end of 2013). MA shares are now trading on a 36.3x LTM P/E. However, we believe MA shares offer an example of how "growth" has beaten "value" and continue to be an attractive investment.

MA Share Performance vs. V, AXP, & S&P 500 (Last 5 Years)

Source: Bloomberg Markets (29-March-19).

When Growth Beats Value

MA shares have massively outperformed fellow card company American Express (AXP) since the end of 2013, returning 2.9x vs. AXP's 1.3x (including dividends). This is despite MA having started with a far higher P/E multiple, with MA at 32.0x vs. AXP at 18.6x as of 2013 year-end (as shown below). During this period, AXP's P/E multiple has in fact contracted by nearly 4x to 14.9x, while MA's has expanded by more than 4x to 36.3x.

Comparison of EPS, Share Price, & P/E - MA vs. AXP (2013 Year-End to Latest)

Source: MA company filings and AXP company filings

However, changes in valuation multiples have only played a minor role in MA's outperformance. Most of the return in MA shares since 2013 year-end has come from earnings growth, with its EPS nearly tripling from $2.61 to $6.49 (see table above). For AXP, even had its multiple not contracted, its shares would still only have returned 1.6x, far inferior to MA's 2.9x. A graphic representation of the different contributors to the shares' returns is below:

MA Share Return Bridge (2013YE to Latest)

Source: MA company filings, Bloomberg Markets (29-March-19).

AXP Share Return Bridge (2013YE to Latest)

Source: AXP company filings, Bloomberg Markets (29-March-19).

Our view on MA's

This article was written by

Librarian Capital profile picture
7.77K Followers
Global, long-term, fundamentally-oriented & concentrated investing. With more than 10 years' buy-side experience, I look at stocks globally and across industries, with a focus on the U.S. and U.K.. My investing style can best be described as "Quality Growth" or "Growth At a Reasonable Price". (previously writing under the name "Blue Sky Capital" until December 2019)

Disclosure: I am/we are 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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