Mastercard: Revenue Growth Resumed In Q1, 10%+ Annualized Return Ahead

Summary

• Mastercard returned to positive year-on-year revenue growth in Q1 2021, with volume up double-digits both globally and in the U.S.
• Volume recovery is accelerating and visible in March and April figures; there is significant pent-up demand in high-margin Travel.
• Mastercard continued to make strategic progress in value-add services, in winning customers and in building its "multi-rail" with M&A.
• Management outlook implies a 20% year-on-year EBIT recovery in Q2, and their comments point to continuing P&L recovery in H2.
• At $382.06, we expect an exit price of $554 and a total return of 48% (11.3% annualized) in just under 4 years. Buy.

Photo by Serhii Ivashchuk/iStock Editorial via Getty Images

Why is Mastercard Stock Down?

Mastercard (NYSE:MA) released its Q1 2021 results last Thursday (April 29) morning, and shares have fallen by 3.4% in the subsequent two days.

We initiated our Buy rating on Mastercard stock in April 2019. Since then, Mastercard shares have gained 64% (including dividends) in 2 years, nearly 15 ppt ahead of the S&P 500, including up 7.2% in 2021 year-to-date.

We believe the small dip in the share price was inconsequential, and Mastercard shares continue to offer a 10%+ annualized return. We believe Q1 results support our investment case in showing that:

• Mastercard volume and revenues are already higher than pre-COVID levels
• Recovery in volume is accelerating, and the pent-up demand is significant
• Mastercard continues to achieve strategic as well as financial progress

Return to Positive Revenue Growth

Mastercard's Q1 2021 total revenues were 2% higher year-on-year, relative to a prior year that grew 5%, continuing the recovery in preceding quarters:

Mastercard Revenue Growth Y/Y by Quarter (ex-Currency) (Since 2019) Source: MA company filings.

Click to enlarge

The recovery in Mastercard's volume is much stronger and is accelerating.

Return to Double-Digit Volume Growth

In Q1 2021, excluding currency, Mastercard's Purchase Volume grew 10% year-on-year globally, compared to a prior-year quarter that was only partially affected by COVID-19 and grew 8.3%:

Mastercard Purchase Volume Local Growth (Since Q1 2019) Source: MA results supplement (Q1 2021).

Click to enlarge

Mastercard volume has grown because of both a general recovery in spending and a specific share gain by electronic payments. In the U.S., Mastercard's volume grew 14.0% in Q1 compared with a 12% growth in retail sales (excluding auto and gas; per Mastercard estimates); in Europe, its volume grew 7.5%, compared with retail sales that were close to flat.

Mastercard's operational figures showed how the pandemic has accelerated card use. The total number of cards was up 8.0% globally year-on-year in Q1, and the number of Purchase Transactions was up 9.6%:

MA Operational Performance (Q1 2021) Source: MA results supplement (Q1 2021).

Click to enlarge

Q1 volume figures were also unusually strong against the traditionally strongest Q4 holiday season. In the U.S., Q1 2021 Purchase Volume grew 1.7% sequentially (compared to a decline of 3.0% in Q1 2019), and globally Q1 Purchase Volume was down only 1.9% (compared to 4.3% in Q1 2019).

Currency was a tailwind, adding approx. 2 ppt to year-on-year Gross Dollar Volume growth and 2.5 ppt to Purchase Volume growth.

Q1 2021 Purchase Volume of $1,296bn globally and $479bn in the U.S. also exceeded the Q1 2019 figures by 18.8% and 22.1% respectively (the Q1 2019 figures were $1,091bn and $392bn).

Volume Recovery is Accelerating

Mastercard's Q1 volume, when shown by month and supplemented with April month-to-date figures, showed a clear acceleration in the recovery:

Mastercard Volume Local Growth (Since 2021) Key: XB = Cross-Broder, CNP = Card Not Present, CP = Card Present. Source: MA results presentation (Q1 2021).

Click to enlarge

Year-on-year growth in Mastercard's total Switched Volume accelerated, from 4% in January and February, to 30% in March and 65% in April, as we lap the increasing disruption from COVID-19 in the prior year. Measured as a percentage of 2019 levels, Switched Volume has still accelerated by a few ppt, from 120% or lower in January and February, to 123% in March and April.

Mastercard's CFO gave more detail on the volume recovery in Q1:

"Switched volumes ... have shown steady sequential improvement, continuing along the same trendline we saw in Q1. This is driven primarily by the U.S., which has benefited from the recent fiscal stimulus. We have seen improvements in discretionary categories like clothing, furniture and sporting goods. And we have also seen some recent strength in personal domestic travel in the U.S. and the U.K., which are making strong progress in vaccinations"

Sachin Mehra, Mastercard CFO (Q1 2021 earnings call)

Cross-Border Volume has shown a steady acceleration, with improvements in both Cross-Border Card Not Present ex Travel and in Cross Border Travel, both in terms of year-on-year growth and as a percentage of 2019 levels.

Like-for-Like EBIT Stabilized in Q1

Mastercard's Q1 2021 EBIT was 0.9% lower year-on-year but 4.5% higher than Q4; EBIT would be flat year-on-year excluding 1 ppt of headwind from acquisitions, which added 1 ppt to revenues and 4 ppt to Operating Expenses:

Mastercard P&L (Q1 2021) Source: MA results release (Q1 2021).

Click to enlarge

Revenue growth has lagged volume growth due to mix, particularly as high-margin Cross-Border Volume remained substantially lower year-on-year. Domestic Assessments revenues lagged volume value, and Transaction Processing revenues lagged the number of transactions, also due to mix.

Significant Pent-Up Travel Demand

Mastercard executives referred to significant pent-up demand for Travel on the Q1 earnings call, and highlighted how "U.S. airline spend essentially doubled over the last four weeks relative to where it was earlier in Q1".

American Express (AXP) has observed the same improvement in Travel bookings when they reported their Q1 results on April 23:

"We're seeing ... our Travel bookings are up 50% ... this quarter, up 50% over Q4 '20 ... in March ... we were 50% of 2019 bookings. So we have 31% in February and then went to 50% ..."

Steve Squeri, AXP CEO (Q1 2021 earnings call)

The American Express CEO also observed how Travel & Entertainment ("T&E") spending has recovered by different age groups, with the youngest group recovering first and the older groups then following as they were vaccinated:

"People that are younger are getting back at a much higher level. Their overall T&E spending is probably about 85% to 90% and ... almost 100% back to where they were in 2019 in restaurants. And then when we look at older people, as they get vaccinated, we're seeing sequential growth month-on-month, as we look at their growth. And so, if you look at, just people over 45, you're seeing an 11% increase in their overall T&E spending month-to-month".

We believe the higher overall spend volume we are already seeing will translate into much higher Travel volumes, and thus much higher revenues for Mastercard, as soon as vaccinations are completed and the pandemic ends.

Continuing Strategic Progress

Mastercard has continued to make strategic progress in multiple areas.

One strategic priority is to provide more value-add services, and Mastercard's success in this was visible in the 27% (ex-currency) year-on-year growth in "Other Revenues" shown above. Only 3 ppt of the growth came from acquisitions, with the rest from Mastercard's success in providing value-add services, especially in Cyber & Intelligence and Data & Services.

Mastercard also had a number of customer wins in Q1 2021, including:

• With Santander, Mastercard signed a new deal with Santander Brazil and signed a new long-term exclusive deal to provide digital prepaid accounts in seven LATAM countries to Superdigital Santander's fintech arm.
• In Africa, Mastercard signed a multi-year partnership with telecom provider MTN Group (OTCPK:MTNOY) to provide a virtual payment solution for millions of MTN Mobile Money wallet customers.

Mastercard also continued to pursue its multi-rail strategy through acquisitions. (Being "multi-rail" means operating multiple payment rails, including real-time payments, to suit different customers and different payment flows.) The $3.2bn acquisition of Nets' Corporate Services business, first announced in August 2019, was finally completed in Q1 2021. In April Mastercard also announced the $850m acquisition of Ekata, a provider of identity verification solutions to merchants, financial institutions, marketplaces and platforms.

2021 Outlook Implies More Recovery

Mastercard executives' comments on the Q1 earnings call pointed to continuing recovery for the rest of 2021, led by U.S. spending and vary between different countries, with significant pent-up demand in international travel that may see selective resumption in H2:

"We now believe many markets are transitioning from the normalization phase to the growth phase domestically. Cross-border travel spending continues to be in the stabilization phase where spending is restricted due to closed borders ... we've seen some recent improvements in domestic travel, primarily personal travel... we believe there's significant pent-up demand for travel as we've just seen in domestic travel. We expect domestic travel to improve progressively throughout the year in countries with strong vaccination programs. International travel should start to open on a select basis in the second half of the year"

Michael Miebach, Mastercard CEO (Q1 2021 earnings call)

For Q2 2021, on an organic basis, Mastercard is guiding to a low-to-mid 20's year-on-year growth in Net Revenues (after a 17% decline last year) and a low 20s growth in Operating Expenses (after a 5% decline last year):

Mastercard Q2 2021 Outlook Source: MA results presentation (Q1 2021).

Click to enlarge

Including the impact of acquisitions and currency, Net Revenue growth is expected to be in the high 20s and Operating Expenses growth is expected to be in the mid 30s (on a Non-GAAP basis). These imply a year-on-year EBIT growth of more than 20% (Non-GAAP EBIT margin was 51.8% in Q2 2020).

Is Mastercard Overvalued?

At $382.06, relative to 2020 financials, Mastercard shares are trading on a 58.8x P/E and a 1.6% Free Cash Flow ("FCF") Yield; relative to pre-COVID 2019 financials, Mastercard shares are at a 47.9x P/E and a 1.9% FCF Yield:

MA Net Income, Cashflows & Valuation (2016-20) Source: MA company filings.

Click to enlarge

Mastercard's Dividend Yield is 0.5% ($1.76 per share), after the quarterly dividend was raised by 10% in December.

Mastercard bought back $1.36bn of shares in Q1 2021; another $418m were purchased up to April 26. More than $8bn remains in the authorized repurchase program, equivalent to 2.1% of the current market capitalization.

Because of Mastercard's demonstrated dividend resilience and long-term compounding potential, we believe it merits a long-term P/E of 42x. While current P/E multiples are higher, they are based on historic earnings that we believe do not reflect Mastercard's current earnings power. In addition, whether a stock is "overvalued" depends on its prospective returns from the current price, not on valuation multiples based on snapshot financials.

Will Mastercard Stock Go Up?

We increase our 2021 estimates slightly based on management's Q2 outlook. We now assume Net Income will be 15% higher year-on-year in Q2 2021, and 10% above its 2019 levels in Q3 and Q4, giving a full-year Net Income that is flat-ish (0.2% down) from 2019 but 24.3% higher year-on-year:

Mastercard Net Income by Quarter - Historical & Estimates Source: Librarian Capital estimates.

Click to enlarge

We keep most of our other assumptions unchanged:

• 2021 Net Income to be $8.04bn (was $7.92bn) as explained above
• 2022 Net Income to grow 20% year-on-year (was 15%)
• From 2023, Net Income to grow at 15% each year (unchanged)
• Share count to fall by 1% each year after buybacks (unchanged)
• Dividend to be $1.80 in 2021 (was $1.68), and to grow on a 25% payout ratio thereafter (was 20%)
• 2024 P/E of 42x (unchanged), implying a 0.6% Dividend Yield

Our new 2024 EPS estimate of $13.20 is 6% higher than before ($12.47).

At $382.06, we expect an exit price of $554 and a total return of 48% (11.3% annualized) by 2024 year-end, in just under 4 years:

Illustrative Mastercard Return Forecasts Source: Librarian Capital estimates.

Click to enlarge

Is Mastercard Stock a Buy? Conclusion

Mastercard returned to positive year-on-year revenue growth in Q1 2021, with volume up double-digits both globally and in the U.S.

Volume recovery is accelerating and visible in March and April figures; there is significant pent-up demand in high-margin Travel.

Mastercard continued to make strategic progress in value-add services, in winning customers and in building its "multi-rail" with M&A.

Management outlook implies a 20% year-on-year EBIT recovery in Q2, and their comments point to continuing P&L recovery in H2.

At $382.06, we expect an exit price of $554 and a total return of 48% (11.3% annualized) in just under 4 years.

We reiterate our Buy rating on Mastercard.

(We are Buy-rated on Visa (V) and PayPal (PYPL), and Neutral-rated on American Express.)

Note: A track record of my past recommendations can be found here.

Analyst’s Disclosure: I am/we are long MA, V, PYPL. 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.

Comments

[Value Yield Investing]

Thanks for the article. In addition to the near-term estimates, do you have a long-term estimate regarding the growth rate for Mastercard over - let's say - the next 10 years?

[Librarian Capital]

@Value Yield Investing Thank you for reading. I would expect 10-year growth to be similar to 5-year but a bit lower, probably still in the low-to-mid teens (for EPS).

[Dividend Latitude]

Revenue growth resumed? That's good news, and it's about time! I say that because TD surpassed MA as my largest position last week. That should never have happened.

[Librarian Capital]

@Dividend Latitude Thank you for sharing. That's a nice problem to have, I guess.

[kata]

Are they using crypto or blockchain yet?

[Librarian Capital]

@kata From the Q1 2021 call:

"We have several new crypto partnerships approved for launch this quarter including a partnership with Gemini, a leading crypto platform here in the US to launch a first of its kind cryptocurrency rewards credit card that allows consumers to receive crypto rewards on everyday purchases.

And over in Spain, Crypton, a crypto exchange launching a Mastercard Crypto Card.

On central bank digital currencies, we continue to engage with central banks around the world and our virtual testing platform is helping them design features similar issuance and evaluate interoperability with existing payment systems. In partnership with the Central Bank of Bahamas and Island Pay, we launched the world's first CBDC-linked payment card, enabling people to pay for goods and services using fiat currency anywhere Mastercard is accepted."

[kata]

@Librarian Capital

thank you :)

[tom g]

ChuckXX ...as a holder of MA since the IPO I agree with your thoughts regarding government going after transaction fees. However I do believe whatever settlements occur. The issuers will pay the lion's share since the vast majority of the profis from the transactions go into their pockets. Long MA and V.

[Librarian Capital]

@tom g I am not sure this is true. Substantial settlement penalties do appear on Visa/Mastercard's P&L, and any reduction in interchange fees will also be borne by them.

[ChuckXX]

I have owned MA since its IPO back in 2006 & its my 2nd largest holding. I own a boatload of shares thanks to the 10 for 1 split on JAN. 22nd, 2014. I've said this before but it bears repeating. The greatest threat to both MA & V is not their competitors BUT its the Governments of the world. For those that do not know MA is being sued by the EU for around $13 Billion on an anti-trust case and V is being investigated by our DOJ on debit card fees. Most investors know there is no true dishonest behavior going on but most likely both companies will settle like they have in the past. These governments see these 2 companies as ripe for the picking and they love fleecing them of their profits. At some point down the road they will also come for AMZN, MSFT, AAPL, GOOG, & FB. They have to feed their insatiable thirst for their socialism agenda and please the masses. Its not really as complicated as people make it.

[Librarian Capital]

@ChuckXX Thank you for leaving good comments as usual. I agree MA/V's business model are very strong and can threatened only by government/regulator action. I talked about this in some detail in my most recent article on Visa a few weeks ago:

seekingalpha.com/...

Many people have referred to MA/V as a duopoly in the past.

I am long both Visa and Mastercard. However, I am also long shares in other companies and have parents who were small business owners before they retired. So I am not keen for V/MA to have unfettered power to charge whatever they like - some regulatory push-back is healthy, and the US has a good history of anti-trust enforcement going back to the time of President Theodore Roosevelt in the early 1900s.

The current main lawsuit against Mastercard is a class action in the UK., led by individuals. The EU has just approved Mastercard's acquisition of Nets Corporate Services, as mentioned in the article, with the only remedy required being the licensing of Nets technology to one competitor.

[kata]

@Librarian Capital

There's Pypl and Amex and Alipay, prob the biggest of all, and somehow I don't see anyone but China attempting to rein it in.

sounds like competition to me

[Librarian Capital]

@kata

American Express is probably the only like-for-like competition in that list, and AmEx's model is inferior to Mastercard's because (1) AmEx cannot count on the marketing spend and balance sheet strength of card-issuing banks the way Mastercard can; (2) AmEx's acceptance network outside the US has still not reached parity with Mastercard.

PayPal is not really competition at this point, being more targeted at previously unserved use cases like P2P or people who don't have credit cards. Over time it will become more of a competition in online e-commerce and maybe even physical checkouts, but PayPal is still relatively small and there is enough room for everyone.

Alipay and Mastercard have low overlap. Alipay really only operates in China, where Mastercard has only been given approval to process domestic transactions recently. Outside China Alipay is really only in a few businesses which serve Chinese customers. You will almost never find a US/Europe consumer using Alipay.

[ozcutty1]

I’m pretty sure MasterCard will blow past conservative estimates for the rest of the year. Things will come back faster than expected due to pent up demand and all the work they’ve done during covid to drive contactless and online shopping will pay off big time. Also expect fuel prices to lift and inflation to flow though which is great for MasterCard.

[Librarian Capital]

@ozcutty1 Thanks. You might be right, but ultimately the short term is hard to predict and only forms a small part of a company's intrinsic value.