- Mastercard's total volume was 30% above the 2019 level in the first 3 weeks of July, after being at 27% higher in Q2 and 21% higher in Q1.
- There was a spike in cryptocurrencies in from April to May; excluding this, the recovery in cross-border volume has been steady.
- Q2 revenues were 10% higher than in 2019, even with high-margin non-intra-Europe cross-border volume still at 79%; EPS was 3% higher.
- Shares are trading at 48.3x 2019 earnings, but we expect earnings to quickly rebound above that after COVID travel restrictions end.
- With shares at $385.94, we expect a total return of 50% (12.7% annualized) by end of 2024. Shares will likely exceed $650 in 2025. Buy.
We review our Mastercard Incorporated (NYSE:MA) investment case after Q2 2021 results were released on Thursday (July 29).
We initiated our Buy rating on Mastercard stock in April 2019. Since then shares have gained 65% in just under 2.5 years, about 10 ppt ahead of the S&P 500, including 8.3% in 2021 year-to-date:
Librarian Capital's MA Rating History vs. Share Price
Source: Seeking Alpha (01-Aug-21).
Mastercard has been one of the long-term winners in Payments, and we believe COVID-19 has accelerated its trajectory further. Q2 results provided another snapshot of its progress, and our updated forecasts show a total return of 50% (12.7% annualized) by 2024 year-end, in just under 3.5 years.
Mastercard Buy Case Recap
Our investment case on Mastercard has been based on our belief that its 15%+ EPS CAGR and premium valuation would continue, driven by:
- Electronic payment volumes are growing structurally, from both GDP growth and the continuing shift away from cash and cheques
- Even in the U.S. and Europe, a significant amount of consumer spending remains in cash; the potential is even greater in newer geographies
- Incumbent payment networks enjoy natural advantages in scale and network effects; regulations ensure a high barrier to entry
- Mastercard and Visa (V) are increasingly penetrating new payment verticals including Business-to-Business, Business-to-Consumer and Peer-to-Peer
- They are also increasingly providing value-add services that utilise their platform status and wealth of data, adding further revenue growth
- Payment networks have natural operational leverage, being highly scalable and having largely fixed costs, so earnings grow faster than revenues
COVID-19 has dramatically accelerated the shift to electronic payments, but international travel restrictions have diverted spending from high-margin cross-border volumes, materially reducing Mastercard's revenues.
We believe that new habits with electronic payments formed during the pandemic will persist into the future, while consumer international travel will return in strength as soon as restrictions are lifted, meaning that Mastercard's P&L will rebound strongly after COVID-19 to resume its 15%+ EPS CAGR.
Q2 2021 results provided more datapoints supporting our investment case.
Total Volume 30% Above Pre-COVID Level
In Q2 2021, Mastercard's Switched Volume rebounded 44% from Q2 2020, the first full quarter after COVID-19 lockdowns, and was 27% higher than pre-COVID 2019 figures, accelerating from being 21% higher in Q1; the figure was 30% in the first 3 weeks of July:
Mastercard Volume Local Growth (2021 vs. Prior Years)
Key: XB = Cross-Broder, CNP = Card Not Present, CP = Card Present.
Source: MA results presentation (Q2 2021).
Cross-Border Volume in Q2 2021 was 87% of the 2019 level, with Other Cross-Border (i.e. excluding Intra-Europe) Volume at 79% of the 2019 level, as most international travel remained heavily restricted. Intra-Europe Cross-Border Volume, which is lower margin, exceeded 2019 levels from June.
Within Cross-Border Volume, Travel has continued to recover, from being at 38% of 2019 level in Q1, to 57% in June and 66% in July month-to-date.
Cross-Border Spike Due to Cryptocurrencies
Cross Border Card Not Present excluding Travel ("XB CNP ex. Travel" in the table above) first accelerated to 174% of 2019 level in May, then moderated to 159% in June and 148% in July. Mastercard stated this was "in part" due to lower cryptocurrency purchases and e-commerce promotions in 2019.
Visa's Cross-Border Volume (excluding Intra-Europe) data showed the same pattern, with "Card Not Present, Excluding Travel" decelerating from being at approx. 160% of the 2019 level in May to approx. 140% in July:
Visa Cross-Border Volume, Indexed to 2019 (Ex. Currency) (Since April 2021)
Source: Visa results presentation (Q3 FY21).
Visa attributed the deceleration to cryptocurrencies, and described the higher May level as a "spike" mostly attributable to cryptocurrencies:
(We observed) a spike in cross-border cryptocurrency purchases from mid-April through the end of May ... Cross-border card-not-present volume, excluding travel, continued to be very strong, up 56% from 2019, improving 12 points from the second quarter, with cryptocurrency purchases representing most of that acceleration. We have seen more active cards and more spend per card in cryptocurrency purchases.
Vasant Prabhu, Visa CFO (Q3 FY21 earnings call)
Excluding cryptocurrencies, the recovery in Cross-Border Volume has been steady, though the next stage of significant improvement will likely only occur after international travel restrictions are no longer widespread.
Sequential Momentum Continued into Q2
Mastercard's Q2 2021 Purchase Volume was 13% higher than Q1 globally, including 15% higher in the United States. The number of cards (excluding Maestro) was 2.6% higher than Q1 globally, including 4.3% higher in the U.S.:
Mastercard Operational Performance (Q2 2021 vs. Prior Periods)
Source: MA results supplement (Q2 2021).
These figures show strong momentum in Mastercard's business, even if we exclude some of the growth as due to the spike in cryptocurrency purchases.
Group Earnings Now Above 2019 Level
Mastercard's Q2 2021 P&L showed a 31% rebound in revenues and a 36% rebound in its Net Income from the prior year (excluding currency). Compared to Q2 2019, revenues were 10% higher, EBIT and Net Income were flat-ish (up 0.4% and down 0.1% respectively); EPS was up 3% due to buybacks:
Mastercard P&L (Q2 2021 vs. Prior Periods)
Source: MA results release (Q2 2021).
Other Revenues, which include Mastercard's value-add services, rose 32% year-on-year. Excluding 9 ppt from acquisitions, organic growth still exceeded 20%, mostly driven by Cyber & Intelligence and Data & Services solutions.
EBIT and Net Income were flat-ish from 2019 despite higher revenues because Operating Expenses ("OpEx") have risen 23.6%. Mastercard has resumed investments in anticipation of a recovery - Q2 OpEx was 8.3% higher than Q1, with the bulk of the increase ($97m out of $162m) in Advertising & Marketing. Acquisitions also added 8 ppt to year-on-year OpEx growth.
Mastercard was able to cut costs when the future was still uncertain during the early parts of the pandemic. OpEx shrank by 5 ppt year-on-year in both Q2 and Q3 of 2020 (or, excluding acquisitions, by 9 ppt and 8 ppt respectively):
Mastercard Operating Expenses by Quarter (Since 2019)
Source: MA company filings.
Currency was a tailwind in Q2, adding about 5 ppt to revenue and Net Income.
Q3 Outlook Implies Steady Recovery
For Q3 2021, Mastercard expects Net Revenue growth to be in the "high-end of mid 20s" organically, or "high-end of high 20s" including acquisitions and currency. OpEx growth is expected to be in the "high-end of mid-teens" organically, or high 20s including acquisitions and currency:
The outlook implies Q3 2021 revenues will be approx. 10% higher than Q3 2019, similar to what we saw in Q2 2021, while EBIT would be 3% higher:
Mastercard Q3 EBIT vs. Prior Periods (Implied)
Source: Librarian Capital estimates.
Management's outlook assumes "spending levels to continue to improve along the current trajectory", and the P&L implies a steady recovery.
Valuation - Is Mastercard Stock Overvalued?
At $385.94, relative to 2020 financials, Mastercard shares are trading at a 59.4x P/E and a 1.6% Free Cash Flow ("FCF") Yield; relative to pre-COVID 2019 financials, the P/E is 48.3x and the FCF Yield is 1.9%:
MA Net Income, Cashflows & Valuation (2016-20)
Source: MA company filings.
We believe even the lower, 48.3x P/E figure overstates Mastercard's valuation. Volume is already approx. 30% above its 2019 level, Net Income is only about the same at present because volume has been temporarily diverted from high-margin cross-border spending by international travel restrictions. We expect a quick rebound in earnings when these are lifted.
Mastercard's Dividend Yield is 0.5% ($1.76 per share), after the quarterly dividend was raised by 10% in December 2020.
Mastercard has repurchased $3.47bn of its shares year-to-date (as of July 26), equivalent to 0.9% of its market capitalization.
Mastercard Stock Forecasts
Compared to our most recent forecasts in May, actual Q2 Net Income was approx. 23% higher, but the Q3 outlook was approx. 6% lower. We reduce our Q3 forecast correspondingly but keep Q4 changed, which is for a Net Income that is 10% higher than in 2019:
Mastercard Net Income by Quarter - Historical & Estimates
Source: Librarian Capital estimates.
Our new 2021 forecasted Net Income is 2.3% above 2019 (was 0.2% lower).
We keep our other assumptions unchanged:
- 2021 Net Income to be $8.25bn (was $8.04bn) as explained above
- 2022 Net Income to grow 20% year-on-year (unchanged)
- From 2023, Net Income to grow by 15% each year (unchanged)
- 2021 share count to be 994m (was 996m)
- From 2022, share count to fall by 1% each year (unchanged)
- 2021 dividend to be $1.80 (unchanged)
- From 2022, dividends to be based on a 25% payout ratio (unchanged)
- 2024 P/E of 42x (unchanged), implying a 0.6% Dividend Yield
Our new 2024 EPS estimate of $13.57 is 3% higher than before ($13.20):
Illustrative Mastercard Return Forecasts
Source: Librarian Capital estimates.
With shares at $385.94, we expect an exit price of $570 and a total return of 50% (12.7% annualized) by 2024 year-end, in just under 3.5 years.
If Mastercard continues its mid-teens EPS CAGR and retain a 42.0x P/E multiple, it share price will exceed $650 by 2025 year-end.
Is Mastercard Stock a Buy? Conclusion
Mastercard's total volume was 30% above the 2019 level in the first 3 weeks of July, after being at 27% higher in Q2 and 21% higher in Q1.
There was a spike in cryptocurrencies in from April to May; excluding this, the recovery in cross-border volume has been steady.
Q2 revenues were 10% higher than in 2019, even with high-margin non-intra-Europe cross-border volume still at 79%; EPS was 3% higher.
Shares are trading at 48.3x 2019 earnings, but we expect earnings to quickly rebound above that after COVID travel restrictions end.
With shares at $385.94, we expect a total return of 50% (12.7% annualized) by end of 2024. Shares will likely exceed $650 in 2025. Buy.
Note: A track record of my past recommendations can be found here.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of MA,V, PYPL either through stock ownership, options, or other derivatives. 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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