Mastercard: Making A Call On 2020
Summary
- With the huge economic impacts of COVID-19, the price of the stock now reflects far less than perfection.
- While Q1 2020 would have shown continued reliable growth, March was weak thanks to COVID-19, and Q2 will likely be the bottom in terms of volumes.
- Let the market come down, and take MA under $250, then do some buying.
- Looking for more stock ideas like this one? Get them exclusively at BAD BEAT Investing. Get started today »
Prepared by Tara, Senior Analyst at BAD BEAT Investing
Make no mistake, Mastercard (NYSE:NYSE:MA) continues to deliver solid performance, and in our opinion, this stock remains a buy, especially after its sizable pullback in the COVID-19 crisis. Sure, there will be reduced volumes, less consumer spending, and a slowdown in growth in the next two quarters. The market priced that in with a 100-point drop from the top. Recently, shares started rebounding with the broader market. We think the market is set to continue pulling back in the coming weeks and if you can get into shares under $250, it makes for a solid long-term investment.
Yes, right now, it is painful relative to the growth path the stock and company were on. Yes, valuation-wise, the stock has long been overvalued, but that valuation has come in lower, particularly if we 'exclude' the earnings impacts over the next few quarters and look to 2021. On the next big pullback, we think this stock still makes an excellent addition to any portfolio focused on growth. Of course, it must be stated that the name has been priced for continued near-perfect performance of the underlying company.
As we will see in a moment, with the huge economic impacts of COVID-19, the price of the stock now reflects far less than perfection. Some will say, it is still overvalued. Perhaps. But let us face facts. For years, the argument of the name being overvalued has been made, but shares continue to rise. Despite the pain, we will feel economically in the next few months, maybe even a year, Mastercard as a company has continued to invest in itself.
Will growth return? We believe that it is only a matter of time, and if this market does as we expect it to do, growth will return from increasing volumes as people get back to work, businesses open, and the company manages it expenses. We think, in 2021, a double-digit growth in earnings returns. Yes, pain is real right now, but we must look ahead. Mastercard is a growth machine, to continue to run higher, performance must continue. In this column, we will examine trends in sales and earnings and discuss our expectations looking ahead.
Volumes impact revenue growth
Regardless of the broader market action, the data remains strong. The recently reported quarter saw top line growth, albeit lower growth than we have been accustomed to relative to past reporting periods. As you can see (and perhaps unsurprisingly), the growth has slowed versus past Q1 revenues:
Source: SEC filings, graphics by BAD BEAT Investing
As you can see from the graphic, the growth in revenues had been impressive. Here in Q1 2020, growth continued, but as we all know economic activity slowed heavily in March. Internationally, activity began slowing even earlier. We expect Q2 and Q3 will see pain as well, but think Q4 2020 and 2021 are set to see a ramp-up in activity. The results strongly suggest that the company would have easily continued its stable and reliable growth had it not been for COVID-19. And it is not the virus itself that killed growth, but the actions of the government to try and quell the spread to prevent a run on hospitals, and widespread death. A so-called 'flattening of the curve.' Net revenue for the quarter came in at $4.0 billion, a 5% increase over Q1 2019. This was primarily due to an increase in gross dollar volume and an increase in processed transactions.
Mastercard saw an 8% jump in gross dollar volume, at the higher end of our wide range for COVID-19 impacted Q1 expectations for 5%-9% growth, and saw a 13% increase in transactions processed, also above our (albeit wide) expectations for 11-14% growth. The transaction growth drove the gains we saw in revenues. Now, it was not all positive. First, we had to ratchet down our expectations as COVID-19 ramped up. As we mentioned earlier, internationally, things slowed down before they did in the U.S. As such, cross-border volumes took a lump. They contracted 1%. Expect more declines in Q2. Of course, with so many more transactions processed, we need to be on the lookout for rising expenses. This is because a rise in expenses could offset revenue and pressure margins.
Operational expenses rose
One consideration to keep in mind is that operational expenses do continue to rise rather sharply, and in this case, offset the rising revenues. Expenses grew year-over-year vs. last year by 7% on an adjusted basis. On a currency-neutral basis, expenses were up 8%. In this quarter, the pace of revenue growth lagged the operational expense growth. It should be noted that continued investment in strategic initiatives as well as normal operational growth expenses resulted in the expense trend moving higher.
Obviously, we hate to see rising expenses. Total adjusted operating expenses were $1.8 billion for several reasons, including primarily spending related to strategic initiatives, as well as higher promotional spending and of course acquisition-related integration expenses. Of the total increase, 6 points were due to acquisition-related expenses. Now, when we factor in the increase in revenues, as well as the increase in expenses, we still see that it led to operating income increasing and was flat as reported at $2.2 billion. Perhaps not surprising, adjusted operating margin contracted to 55.3% from 56.9%. With the slight revenue growth and slight margin contraction, we saw meager growth in adjusted EPS.
Earnings growth slows
Putting it all together, we see earnings growth. We have more transactions being processed, we have growing revenues, but narrowing margins. Again, expect Q2 to get even worse, and that is why the market has revalued the stock significantly lower. Much like the revenue trend, the EPS trend stalled in Q1:
Source: SEC filings, graphics by BAD BEAT Investing
Net income was about flat at $1.8 billion versus the $1.8 billion a year ago, and hit $1.83 per share versus $1.78 per share. This result comes from higher-than-expected revenues, a slightly higher rise in expenses than expected, and the company also repurchased $1.4 billion worth of stock in the quarter (4.7 million shares). As we move forward, we expect EPS growth to remain stalled in the next quarter, and likely into Q3.
2020 projections
Make no mistake, handicapping performance in these unprecedented times is difficult, but we see reason to be hopeful for the prospects of the stock. Factoring in the trajectory of Mastercard's performance in 2019, as well as the investments the company has made strategically, we still see some growth in 2020. Ultimately, the shape and speed of the recovery will be determined by the effectiveness of policy initiatives. It is tough to forecast though.
Of course, we have to consider the trends in new cards being issued, transaction volume growth, and gross dollar volume growth. We think Q2 will be the bottom, and in the call slides we saw about a 25% reduction in volume in the first few weeks of April. This is because internationally things are starting to open up. In the United States, there are plans for opening based in phases. Those phases will impact where Mastercard sees volumes. We would expect some sectors, particularly where there is demand now, like home improvement, clothing, and out to eat dining to normalize sooner than later. Then later, domestic and intra-regional travel to normalize after that. Other areas like mass entertainment and long-haul travel will probably take longer to recover. There will also be geographic variability.
Based on what we are seeing to-date, we are going to make a call here on 2020 revenues coming in at $15.0-16.0 billion and earnings per share coming in at $6.00-$7.00. This is based on annual volumes increasing in the low-single digits, contraction in cross-border volumes in the single digits, and operational expenses higher in the single digits.
Take home
What we are seeing in 2020 is true contraction thanks to policy decisions that simply limit commerce. Let the market come down, and take MA under $250, then do some buying.
If you like the material and want to see more, scroll to the top of the article and hit "follow."
Cinco De Mayo Week Special: Secure Your 65% Off Discount Now
Like our thought process here? Stop wasting time and join the community of 100s of traders at BAD BEAT Investing at an compounded 65% discount versus the regular monthly rate!
- Full access to an expert team of 4, available all day during market hours.
- Rapid-return trade ideas each week, as well as market commentaries.
- Target entries, profit taking, and stops rooted in technical and fundamental analysis.
- Monthly deep value situations.
- Stocks, options, trades, dividends, and one-on-one portfolio reviews.
This article was written by
Quad 7 Capital is a team of 12 with a wide range of experience sharing investment opportunities for nearly 7 years. Quad 7 Capital as a whole has expertise in business, policy, economics, mathematics, game theory, and the sciences. They share both long and short trades and invest personally in the stocks they discuss within their investing group. They lead the investing group Bad Beat Investing include: daily market commentary and market briefing, 1-2 trade ideas per week, 5 chat rooms for a range of sectors, volatility screeners, unusual options activity alerts, and economic calendars. Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MA over 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.
Recommended For You
Comments (14)
Pay pal and SQ get all the hype
Don't believe the hype.
Buy the moat
LONG V and SQ
"Let the market come down, and take MA under $250, then do some buying."You are little bit late with your article! Don't you think so?
Just not sure. I guess no one is