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A Value look at MasterCard Inc (MA)

May 21, 2011 10:23 PM ETMA, BRK.A, BRK.B
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A Value look at MasterCard Inc (MA)  5/21/2011

by Bud Labitan

Does MA make for an intelligent investment or intelligent speculation today? Someone at Berkshire Hathaway thinks it is. So, let us play a game and estimate an intrinsic value.

MasterCard Incorporated (MasterCard) is a global payments company that provides a economic link among financial institutions, businesses, merchants, cardholders and governments worldwide, enabling them to use electronic forms of payment instead of cash and checks. The Company provides a variety of services in support of the credit, debit, prepaid and related payment programs of approximately 22,000 financial institutions and other entities that are its customers. The Company offers payment solutions, which enable its customers to develop and implement credit, debit, prepaid and related payment programs for their customers, which include cardholders, businesses and government entities. MasterCard manages a family of payment card brands, including MasterCard MasterCard, Maestro and Cirrus, which the Company license to its customers. MasterCard generates revenue by charging fees to its customers for providing transaction processing and other payment-related services

Starting with a base estimate of Cash Flow at a value of approximately $3,000,000,000 and the number of shares outstanding at 127,240,000 shares; we used an assumed FCF annual growth of 7 percent for the first 10 years and assume zero growth from years 11 to 15. The resulting estimated intrinsic value per share (discounted back to the present) is approximately $368.54.

You may ask, why use the 3 billion in cash as the starting figure? MA reported an ending cash balance in 2010 of $3,067,000,000


Market Price = $277.5
Intrinsic Value = $368.54  (estimated)
Price To Value (P/V) ratio = .75  and the estimated bargain = 25. percent.

Before we make a purchase, we must decide ( filter #1 ) if MA is a high quality business with good economics. Does MA have ( filter #2 ) enduring competitive advantages, and does MA have ( filter #3 ) honest and able management.

The current price/earnings ratio = 18.7
It 's current return on capital = 38.5

Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.

Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.

Does MA make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?

Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is MA the best place to invest our money today?

Competition: AXP = American Express Company  DFS = Discover Financial Services  V = Visa, Inc.  Industry = Business Services

How will MA compete going forward? Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.

In summary, the estimated intrinsic value per share (discounted back to the present) is approximately $368.54. The Market Price = $277.5  and the Price To Value (P/V) ratio = .75  and the estimated bargain = 25. percent.
Going forward, are there any tranformational catalysts or condition indicators imaginable on the horizon?

As always, I appreciate hearing your views,

Bud Labitan

Author of the new book 'Price To Value'

Author of 'The Four Filters Invention of Warren Buffett and Charlie Munger'

Labitan Partners
budlabitan@ aol.com



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