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Mastercard: Volume Now 30% Above 2019, Strong Earnings Rebound To Come

Aug. 01, 2021 6:52 PM ETMastercard Incorporated (MA)V47 Comments
Librarian Capital profile picture
Librarian Capital


  • 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.

MasterCard and 100 dollar bill
Ekaterina79/iStock Editorial via Getty Images


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

This article was written by

Librarian Capital profile picture
We are no longer publishing new content on Seeking Alpha. To get in touch, use the website or Twitter account on our profile, as comments and messages on this site are no longer checked regularly. Articles published under our name on Seeking Alpha were personal opinions, based on information believed to be correct at the time of writing, but not updated. Librarian Capital is an independent third party that published articles on Seeking Alpha on an ad hoc basis, and we have had no contractual relationship with Seeking Alpha beyond the terms and conditions under which those articles were published.

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.

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.

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Comments (47)

Librarian Capital profile picture
Mastercard CFO Sachin Mehra, in his appearance at the Deutsche Bank Technology Conference today (10-Sep), provided several key updates:

1/ Mastercard’s cross-border volume (including intra-Europe) has returned to 2019 level in August

2/ The latest Aiia acquisition will give Mastercard connectivity in Europe the same way its Finicity acquisition did in the US

3/ BNPL works better with open-loop networks like Mastercard and Visa

4/ Mastercard treats cryptocurrencies as asset class - it doesn't handle crypto or its conversion into fiat

5/ Regarding the Fed’s proposal on debit card routing exclusivity provisions, Mastercard will comply with changes. Its debit card offering is competitive, as many networks have "gaps" in their safety and security features, due to an historic underinvestment in card-not-present security (having relied on PIN in card-present transactions)
High_Table profile picture
@Librarian Capital The confusion here around BNPL is just so interesting.

1. BNPL is providing credit to buyers who aren't using credit cards- its providing credit to the marginal debit/cash buyer (who is a higher credit risk). Industry 'disruptors' are too excited about lending money to people in the short term and are not thinking about the credit cycle. I think back to my experiences being asked to do the work on SoFi and Prosper and CommonBond, LendingClub- big "disruptors" back in 2013-2016. These have been failures in the context of disrupting the traditional banking & lending system.

2. BNPL may be awesome for getting financing on that TV from BestBuy or a Peloton- but how is a separate BNPL app useful for day to day purchases at CVS/subway NFC/debit or credit NFC at restaurants and so many other merchants? You want to disinter mediate V/MA, you'd better make usage and acceptance global like they do. Otherwise, you're a niche solution. Which might be nice for you but doesn't put my V/MA investment at risk. Even so, BNPL is being implemented by V/MA anyway. No one has a monopoly on issuing/selling/lending a financial product- finance is commoditized-and BNPL is a purely financial product.

3. Consumers are using debit cards to pay off BNPL. So the BNPL players would have to divorce consumers from debit networks and push them to ACH to truly disinter mediate the card networks.

4. ...And: ACH is a very slow technology. Bank to bank clearing that requires manual work on part of the bank to clear. Maybe it becomes faster/automated in time, but thats not a solution that has a clear path to being 10x faster/simpler/convenient than existing cards.

I followed you on twitter btw.
Librarian Capital profile picture

Good points, especially #2 and #3 (which I also touched on in Twitter).

There have always been sporadic attempts to disintermediate credit card networks - the latest one is in European airlines, led by Emirates. But sooner or later they all run into the limitations of a closed loop.

Merchants cannot force consumers to use a particular payment method unless they disallow everything else, but disallowing most payment methods would mean losing too much business to competitors.

I think the only attempt close to success at scale is Costco, which in the US only allows 1 credit card network (AXP before 2016, Visa after). Otherwise nearly all attempts have earned in failure.
Thanks again for your excellent analysis.

In your initial note you quote much lower P/E ratios

'MA is currently trading on a P/E of 36.3x, a high level historically; since 2011, MA has finished each year with a P/E between 26x and 33x, as shown below:'

I'd be interested to hear your views on more recent changes in P/E ratios and justification for using higher ratios.

I think this is getting very close to buy territory.
Librarian Capital profile picture
@European1955 Thanks. No question that P/E multiples have gone higher across the market.

To be clear, what is important is the long-term P/E, not the current P/E. What matters is whether, when we combine the long-term P/E and our EPS estimate, does buying a stock now make sense. As an extreme example, people can make a profit on buying loss-making businesses (which have an infinite P/E).

In Mastercard's case, I have assumed a 42x P/E (for Visa I have 40x).

Again this is higher than its historic range. However, historic data, whether it's earnings or valuation multiples, is only one of the datapoints that need to be taken into account when predicting long-term valuation.

Valuation multiples, being the inverse of yields, represent what investors can get in return when holding a stock, and is impacted by what else is available and the relative risk between the two. This is the concept of the "equity risk premium" - my yield from equities should be higher than the risk-free rate, with the gap determined by the extra risk involved and the risk-free rate usually taken as the long-term US Treasury yield. (10-year is at 1.33% and 30-year is currently at 1.94%).

My view is that US Treasury rates will stay low. Perhaps not as low as now but no more than a 2-3% percent. Reasons include both government and private indebtedness, politics and demographics.

On the other side, stocks like Mastercard have earnings that have proved relatively resilient through multiple crises (almost as good as Treasuries) and are structurally inflation-proof (much better than Treasures). I therefore do not expect the equity risk premium to be that high.

All in all, I am comfortable with a 42x P/E for MA, which is a 2.4% yield.

Is this a change from the assumptions I had a few years ago? Yes. But frankly I made a mistake in being too cautious about this and would have made even better returns had I understood things sooner.

Anecdotally, Fundsmith used to tell investors they require a minimum 4% FCF Yield in their holdings. If you look at their portfolio now, this is obviously a criteria they no longer maintain.
@Librarian Capital Thank you for your detailed and considered response. I tend to agree.

However the operating performance suggests that the higher ratios are more than justified.

2011/2019 figures (%, source: Morninstar) are
RoA 19.52 48.01
RoE 34.43 134.83
RoIC 34.09 64.76

Operating Margin 40.41 57.43
Net Margin 28.39 48.08

These are huge improvements and in my opinion justify higher valuations. I think the MA business model suggests that these figures can continue to improve

Your point about Fundsmith is well made. Their average FCF yield now must be under 2.5%, even assuming very good FCF growth (13%), this year.
Librarian Capital profile picture
@European1955 Thank you.

I agree that operating performance at both Mastercard and Visa have improve further; their businesses have increasingly broadened beyond Personal Consumption Expenditures into value-add services and B2B.

I suspect valuation multiples are driven more by future growth prospects than current margins or return on capital, however. For example, Visa has a higher EBIT margin than Mastercard (66.6% vs 53.2% in Q2 CY21), but has traded at lower multiples fairly consistently.
Librarian Capital profile picture
FYI, Visa US volume at 130% of 2019 in Aug, vs. 133% in Jul. Food, drug & fuel better; other categories worse w/ Travel down 7 ppt. Non-US volume "increased" in Aug vs. Jul (as % of 2019). Cross-border volume improved in Aug, at 85% of '19 level vs. 81% in Jul (ex. intra-Europe).
EverydayJoeSchmo profile picture
AAL, DEL, CCL all up today, and MA and V are tanking 3 percent. What the hell is happening?
Librarian Capital profile picture
@EverydayJoeSchmo To be honest I have no idea. It's especially mystifying because other and more expensive stocks, including in Payments like PayPal, did much better.
@Librarian Capital I think the sagging in some payment stocks has to do with an increase in "delta fear" and its impact on travel. The fear level waxes and wanes. I watch the numbers closely and although the media keeps referring to the "delta surge," the numbers in the US and globally have peaked and appear to be heading down. So this could be a very good time to buy stocks like MA and V.
Librarian Capital profile picture
@Doggywag Yes, my theory is centered around growing fears about Mastercard's and Visa's cross-border volumes too.
The stock continues to get creamed. After watching it for ages, I finally bought today around $342. At some point you have to just dive in.
Librarian Capital profile picture
@Doggywag Thank you for sharing and good luck.
Sergi Medina profile picture
Added today.
Long MA.
Librarian Capital profile picture
@Sergi Medina Thank you for sharing. Same here - fingers crossed.
Rowbearto profile picture
We got into MA on the IPO back in 2006 and I would love to see $650 by 2025. I remember many "analysts" were dissing the IPO. I wish all my buys were this profitable. cost basis of $3.90. I'd be happy with $450 by 2025.
Librarian Capital profile picture
@Rowbearto Congratulations on your 100-bagger!
Librarian Capital profile picture
Mastercard share price fell 10% in Aug, now down YTD.

$MA trades at 43x 2019 EPS. Compared to 2019, volume was 30% higher in Jul 1-21, revenues were 10% higher & EBIT was flat in Q2, while share count was 3% lower after buybacks.
@Librarian Capital

Just scrolled through to see what’s affecting MA. Don’t see much news, valuation based on growth isn’t crazy. Maybe they need to adopt some form of blockchain to make themselves more relevant going forward.
Librarian Capital profile picture

A delay in international air travel due to new COVID variants is probably the main cause of share price weakness. International travel is the last part of the economy to recover, after restaurants and domestic travel.

Mastercard also had a higher starting P/E.

I don't think blockchains are relevant to MA in the way you suggested.
@Librarian Capital

From what I understand MA is widely held by hedge funds. I wonder if there’s some kind of dump or rotation taking place.
Wow only up 3% in last 12 months. People are so short sighted, will be making big money when travel returns and we get some inflation
Librarian Capital profile picture

Yes, Mastercard shares are now trading at 45x pre-COVID 2019 EPS, which by itself is lower than the P/E of many software companies that are not growing EPS at double-digits. Relative to 2022 consensus estimates, it is on a 34x P/E, which is cheap on my opinion.
Librarian Capital profile picture
"Mastercard faces biggest UK class action lawsuit" (the FT)

No trial date set yet; "decision had been expected"; ruling also excludes compound interest & estates of consumers who died in '92-'08, cutting claim from £14bn to £10bn. $MA "confident" of further cuts in claim size & viability.
@Librarian Capital These court cases rarely seem to do much to stocks.
Librarian Capital profile picture
@Doggywag Indeed. I posted my comment in case people were curious, that was all.
Acewarp profile picture
@Librarian Capital - thanks for the detailed and helpful analysis. Belatedly, I am writing to ask if you have any thoughts on the impact to Mastercard, Visa and the banks of the clearly emerging BNPL product which has received so much news attention these past few days (especially with Square's $29 bn acquisition).
I've noticed that the card networks' stock prices have declined meaningfully the past few days, more so than the market generally. Do you have any analysis of the market segments for BNPL, versus credit card loan market? Clearly the products (BNPL vs card borrowers) are different tenor borrowings and may reflect different borrower creditworthy classes and needs. But any data or insights you have on this would be appreciated. Many thanks.
Librarian Capital profile picture
@Acewarp I don't have the kind of data you are looking for - my apologies.

I would attribute the recent share price decline to expectations of Fed tapering, but that is a subjective opinion.

Mastercard and Visa have a role to play in BNPL, as networks helping banks who want to provide this.

Ultimately banks are desperate for interest income and credit cards represent one of the most attractive sources of this in their view, so they will want to be involved. Chase, for example, has its My Chase Plan.
Acewarp profile picture
@Librarian Capital Ok, thanks for the quick response and your take on this. My sense (admittedly from 1,000 foot view), is that Chase and BAC will be able to sort the borrower groups out, address with tailored products, and not suffer too meaningfully. Regional and smaller banks may not be able to do that effectively, given their customer bases. And if they lose card business to BNPL users who move to Square and Paypal, that will also hurt the card networks. Will be looking closely for clues/trends on this in coming quarters. Thanks.
How are gross profit margins 100%?
Librarian Capital profile picture
@kata I assume that figure comes from some third-party database.

Mastercard's reports do not mention Gross Profit. Costs of Good Sold for what they do is not clearly defined, since it's all virtual (services).
@Librarian Capital

thanks, from SA
Librarian Capital profile picture
@kata Examples like this make me feel better about having input all data by hand personally on all the companies I cover.
BM Cashflow Detective profile picture
I like almost everything about MasterCard. Technology upgrades, product diversifications and so much more.

I'm long $MA. My largest portfolio position.

According to your estimates, I determine in each case:

TTM PEG ratio of 1.76.

2y PEG ratio of 2.03 and

3y PEG ratio of 2.32.

A PEG ratio in the range of 2 clearly supports a buy rating.

The company is clearly set for long-term growth. Wonderful.
Librarian Capital profile picture
@BM Cashflow Detective Congratulations on what must be good gains on your MA holding to make it your largest position.

Personally I am not a fan of PEG ratios.
BM Cashflow Detective profile picture
@Librarian Capital

Many Thanks.

From my point of view, very pity. But I like this metric because it ensures a significantly better valuation comparability than just the P / E ratio alone.

May I ask why?
Librarian Capital profile picture
@BM Cashflow Detective The P/E part is too short term and the implied relationship too linear.
Leandro_Santos profile picture
Why the assumed 42 PE multiple in 2024? I think that's excessive
Good article nonetheless
Librarian Capital profile picture
@Leandro_Santos Thanks. 42x P/E is the equivalent of a 2.4% yield, reasonable for what is basically a bond with a coupon that grows faster than inflation and is mostly as resilient.

This compares well with 30-year US treasury bond yields, currently yielding 1.9% and has been yielding less than 3% for most of the time since 2014, with a fixed coupon.

It also compares with inflation-proof bonds like TIPS offer a negative yield. (-1.6% for 5-year).
I’m a happy holder for the long run!

I’m interested in what’s your basis for assuming a 25% dividend payout ratio from 2022? I’d enjoy that.
Librarian Capital profile picture
@ADrunkenMarcus Thanks, and congrats on your gains.

With the payout ratio, as an assumption on how the Net Income is spent, I generally assume more dividends because this is more conservative (in terms of EPS accretion) than more buybacks. The Payout Ratio was 25% in 2020 and has averaged just under 20% in 2016-20. MA share price carries a higher P/E than before, and I would expect this to make buybacks correspondingly less attractive compared than dividends.

In any case, with the Dividend Yield at 0.5%, this is not a material assumption.
@Librarian Capital Thanks for the explanation. It makes sense.
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