MasterCard's Journey

Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When Visa and MasterCard (NYSE: MA) went public earlier in the decade, I recall wondering what took these credit-card behemoth's so long to enter the public domain. After raising billions of dollars in their IPOs and setting new records, the companies entered the stock market with a bang. Investors are well aware of the ubiquitous nature of their credit-card technology, and -- although the playing field has grown and evolved -- neither of these companies have ever looked back.

MasterCard is focused on the 85% of consumers who are still using cash for payments as opposed to swiping their debit or credit cards. The global company might have its work cut out for it in Germany, where consumers are only beginning to make the transition from cash to plastic, according to a recent article in The Wall Street Journal.

Nonetheless, the company is not so concerned with which demographic it obtains from that piece of the pie and it is nimble. When it realized in its earlier days it was playing the game wrong in trying to acquire its rivals' market share, it changed its tune. Instead the business-to-business company decided to focus on forming new relationships with a new set of clients, including telecommunications providers, merchants and governments.  And that defines much of the company's focus today - claiming as much as it can of the available 85% of consumers that have not developed credit-or-debit brand loyalty yet.

With $5 billion in cash on its balance sheet, MasterCard is in a position of strength. It is focused on organic growth and continues to strategically add to its business via acquisitions in areas such as mobile payments. With its excess cash, after raising its dividend early in 2012 the company now recognizes more value in performing stock buybacks versus dividend distributions, according to a recent investor conference hosted by the company.

In the first half of 2012 MasterCard returned $1 billion in capital to investors, according to company marketing material. Also in the first half of the year, the company is on track with its own projections having delivered 16% on top line growth and 26% on bottom line growth, according to CEO Ajay Banja speaking at the conference.

As for future growth plans, the company's core business remains debit/credit, prepaid cards and commercial. Mobile payments fit into this, of course, but the company is not so tunnel visioned that is not focused on the more short term. CEO Banja noted at the recent investor conference that despite the fact that MasterCard is investing heavily in mobile payments, integration of this business segment will take time. He recalls the nearly three-decades of time that it took for e-commerce to take off, and notes that it will take time for consumer adoption and infrastructure to facilitate the surge in mobile payments that investors are waiting for. Even if MasterCard is too conservative in its expectations for the proliferation of mobile payments, the company has enough cash on hand and a strong enough balance sheet to catch up rather quickly.

It seems rather odd to compare MasterCard, with key relationships still in the finance sector even with its expansion beyond banking partnerships, to technology giant eBay (NASDAQ: EBAY), but PayPal was a game changer for eBay. Some predict that the online and mobile payments company will represent as much as half of eBay's business in coming years, according to analysts cited on CNBC, given the expectations for e-commerce and e-payments. In eBay's 3Q, a 22% increase in bottom-line growth was largely attributed to the PayPal business.

eBay's recent acquisition of GSI Commerce similarly strengthens its position for both online and off-line retail transactions. Adding GSI to its portfolio of companies coupled with PayPal make this company uniquely positioned for growth in mobile payments and a compelling investment opportunity over the long-term horizon.

Another interesting credit-card stock is Capital One (NYSE: COF). Shares of this financial stock have climbed almost 40% this year. As Sanjay Sakhrani, analyst at Keefe, Bruyette and Woods (KBW) recently pointed out on CNBC, the company strengthened its portfolio with the addition of HSBC's card portfolio and ING Direct, a pair of deals that are accretive to Capital One. The stock trades at eight-times future profits, based on analysis performed by KBW models, which is inexpensive in a sector where competitors are trading at a more highly valued 12x future earnings.

MasterCard and Visa entered the public markets in 2006 and 2008, respectively, and because of the financial crisis the S&P 500 was trading at similar levels in both years. Since those 2006 and 2008 levels of about 1270, the S&P has advanced by 14% to about 1460 today. As for the stocks, since their IPO's MasterCard and Visa have advanced 947% and 151%, respectively (based on historical prices provided by Yahoo! Finance.) Given that much of the future of the credit-card and electronic payments sector is in technology, which once again is in large favor with investors, these financials will likely see further gains ahead.

 


Fool blogger Gerelyn Terzo does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of MasterCard. Motley Fool newsletter services recommend eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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