- MasterCard Incorporated saw growth in gross dollar volume for the first quarter, even though net income saw a drop from the same quarter last year.
- However, the effects of lockdown measures in Q2 may become more apparent, placing downward pressure on gross dollar volumes.
- I take a long-term bullish view on the stock, but short-term pressures remain.
In spite of economic concerns regarding what is expected to be a particularly severe upcoming recession as a result of the economic fallout from COVID-19, online sales have remained quite strong and the trend towards cashless has been increasing as a result of the pandemic.
The stock has seen a significant rise upwards throughout May:
Notwithstanding that the first quarter did not account for the totality of lockdown effects we have been seeing up till now, performance in this quarter remained quite impressive.
Worldwide Gross Dollar Volume was up by 8%, while 6% growth in GDV was recorded in the United States:
When looking at cross-border volume trends, what is particularly interesting is that volumes for card not present transactions (specifically non-T&E or non travel and entertainment) has seen a significant increase - indicating that even in the virtual collapse of the travel industry over the past couple of months - cross-border volumes for other transactions are still seeing a rising trend.
That said, there is the possibility that the second quarter might see pressure on revenues for MasterCard, given that the personal savings rate in the United States has seen a strong spike - up to 33 percent in April 2020 from 12.7 percent in the previous month:
From that standpoint, while online and cross-border non-T&E transactions have thrived during the pandemic, the economic fallout from the pandemic has yet to be fully reflected in official statistics. In this regard, the outlook for Q2 could still be to the downside, in spite of encouraging Q1 results.
Additionally, we see that even though gross dollar volumes grew through the first quarter, net income saw a slight drop from that of the same quarter last year:
However, I continue to take the view that MasterCard remains a strong business and from that standpoint I intend on remaining long the stock.
From a valuation standpoint, both MasterCard and competitor Visa (V) have shown solid long-term growth in earnings per share, with both companies trading at a similar P/E ratio.
With that being said, one potential concern regarding MasterCard when compared to Visa is that the former appears to have low ratio of cash and equivalents / accounts receivable when compared to Visa. This would appear to indicate that Visa has traditionally been more efficient at converting accounts receivable (money owed by debtors) into cash as compared with MasterCard.
Granted, MasterCard does not particularly have a cash flow problem and the ratios for both companies are quite respectable. That said, one would ideally like to see growth in this ratio going forward - any company would prefer to collect cash immediately as opposed to having to wait for payment - which is essentially what accounts receivable is measuring.
On balance, MasterCard is a strong business in an industry that is increasingly becoming digital. Granted, macroeconomic risks going forward and competition from Visa may place downward pressure on the stock in the near-term. However, I still see the long-term outlook for the stock as being favorable and from that standpoint intend to remain long the stock going forward.
This article was written by
Analyst’s 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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