MasterCard On Focus List

4/11/2011


  Recent Price
$263
  Dividend
$0.60
  Yield
0.2%
  P/E Ratio
19
  Shares (millions)
131
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$269.22 - $191.00

Conceived by a group of banks in 1966 and taken public 40 years later, MasterCard ($263; MA) profits from a long-running trend away from cash and toward electronic payments.

In explaining MasterCard's business, it is best to first describe what it doesn't do. The company doesn't issue cards, extend credit to cardholders, determine interest rates, or charge fees to cardholders. Instead, MasterCard sits in the middle of the payment chain, providing the convenience of a secure, electronic payment network.

That network enables credit, debit, prepaid, and other payment programs for 22,000 financial institutions and other entities. MasterCard generates revenue from both the number of transactions and the size of those transactions, so it stands to gain from increased spending by consumers, businesses, and governments as the economy grows. MasterCard, already a Buy and a Long-Term Buy, is being added to the Focus List.

Regulations and possibilities

The strength of MasterCard's business model manifests in solid five-year growth for sales (14%), per-share earnings (35%), and free cash flow (47%). However, interchange fees — a key, if indirect, ingredient of MasterCard's success — have come under regulatory scrutiny.

MasterCard and its peers are lobbying to alter the Federal Reserve's proposal to cap interchange fees on debit cards at $0.07 to $0.12. Those fees currently average $0.44. When the Federal Reserve warned it would miss its original April 21 deadline for finalizing the fees, MasterCard's shares bounced on hopes that the delay could lead to diluted regulations.

MasterCard doesn't generate revenue from interchange fees, which are generally paid to the cardholder's bank by the merchant's bank. But lower interchange fees could exert downward pressure on fees MasterCard charges issuers as contracts come up for renewal. MasterCard considers the potential impact to its U.S. debit-card business — about 14% of total revenue — as manageable. It controls a smaller share of the U.S. debit market than rival Visa ($76; V), and the regulations propose to end the exclusivity of routing debit-card transactions through a single processor, potentially helping MasterCard boost its market share.

Of course, a larger portion of MasterCard's business could be threatened if regulators target interchange fees on credit cards. Even under the current proposal, credit cards could lose some of their traction. The regulations would allow merchants to offer discounts to cash customers and set a $10 minimum on credit-card purchases.

Conclusion

Spending on necessities has risen above prerecession levels, and though discretionary spending hasn't fully recovered, MasterCard sees continued improvement in 2011. Over the next three years, MasterCard projects at least 20% annual profit growth on 12% to 14% revenue growth.

MasterCard, which launched a $1 billion stock buyback in September, seems attractively valued at less than 16 times the 2011 profit estimate. An annual report for MasterCard Inc. is available at 2000 Purchase St., Purchase, New York, NY 10577; (914) 249-2000; www.mastercard.com.

 

MASTERCARD
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '10
3.16
vs.
2.24
+ 11%
260.72
-
215.00
20 - 16
Sep '10
3.94
vs.
3.45
+ 5%
226.30
-
191.00
18 - 15
Jun '10
3.49
vs.
2.67
+ 7%
269.22
-
193.76
23 - 16
Mar '10
3.46
vs.
2.80
+ 13%
269.88
-
216.43
24 - 19
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
5.54
14.05
0.60
269.88
-
191.00
19 - 14
2009
5.10
11.16
0.60
259.00
-
117.06
23 - 10
2008
4.99
9.01
0.60
320.30
-
113.05
36 - 13
2007
4.07
8.00
0.54
227.18
-
95.30
28 - 12
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
82
65
97
98
75
46

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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