The Best Things in Life Are Free, For Investors There’s MasterCard

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

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As the 2012 year draws to a close, I would like to pinpoint on a leader in the global payment industry, MasterCard (NYSE: MA).

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Strengths:

  • Explosive Revenue Growth: In 2006, MasterCard reported revenue of $3.3 billion; in 2011, the company announced revenue of $6.7 billion, representing year over year annual growth of 15.22%, a trend that widely anticipated to sustain well into the future, with projections placing 2016 revenue at $10.8 billion; this growth is a result of a combination of an increase in transactions processed and an increase in the fee derived from each transaction

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  • Dividend: Currently MasterCard pays out quarterly dividends of $0.30, which annualized puts the dividend as yielding 0.25%
  • Institutional Vote of Confidence: 78% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Double Digit Margins: At the moment MasterCard possesses a net profit margin of 28.38%, which represents a strong and profitable company; these comfortable margins are a result of MasterCard's low operating expenses and solid revenue streams 
  • Lack of Debt: The company currently only carries roughly $1 million of debt on their balance sheets, a major upside to the business

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  • Lucrative Business Model: MasterCard has millions of customers, all of which have a credit or debit card, and every time one of these customers utilizes their MasterCard to complete a financial transaction, the company earns a slim fee, providing the company with millions of solid revenue streams
  • Cash & Equivalents: Currently, MasterCard possesses about $3.0 billion of cash and cash equivalents on their balance sheets, a major upside to the business

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Weaknesses:

  • Pricy Valuation: At the moment MasterCard carries a price to earnings ratio of 28.23, a price to book ratio of 10.51, and a price to sales ratio of 9.00, all of which point to a company that is vastly overvalued, however MasterCard’s growth compensates for some of the valuation

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  • #2 in Industry: According to Nilson Report, based on total transaction volume, MasterCard holds a 31% market share, behind the leading company, Visa, with a 63% market share

Opportunities:

  • Capturing Market Share: MasterCard’s current market share, 31%, leaves plenty of room for expansion into the future, and with this massive opportunity; MasterCard has poured millions into advertising campaigns in an attempt to gain market share
  • Dividend Growth: Since implementing their dividend program in 2006, MasterCard has consistently raised their dividend payouts, and further growth in the dividend is highly probable

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  • Growth in # of Transactions: Over the past years, the total number of transactions processed by Mastercard has exploded, and further growth in this sector is highly anticipated and should fuel growth into the future

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  • Mobile Payment Applications: The established world is rarely utilizing cash for financial transactions, however the mobile payment application trend may be the payment method of the future, and Mastercard is on a short list of companies that will benefit from this distinctive trend; with the company developing its pay pass technology
  • Emerging Market Growth: In 2010, MasterCard derived $220 billion from its Latin American region; in 2011, the company drew $277 billion from this region, representing growth of 25.90%; growth in the company’s Asia Pacific/Middle East/ Africa region from 2010 to 2011 came in at 30.05%, and further growth into the future is likely to stem from emerging markets such as these two regions

Threats:

  • Competition: MasterCard faces several other major corporations in the global payment industry, and this competition can lead to serious margin compression
  • Stagnant Global Economic Landscape: In an economic landscape riddled with such uncertainty and stagnation, consumers are less willing to complete financial transactions, hurting MasterCard’s revenue
  • Fiscal Cliff: If the United States was to fall off of the fiscal cliff, tax rates would be raised on all Americans, leaving consumers with less money to spend, and in turn crippling MasterCard’s growth

Competition:

Major publically traded competitors of MasterCard include Visa (NYSE: V), American Express  (NYSE: AXP), Discover (NYSE: DFS), and Capital One (NYSE: COF). All of these companies offer products and services similar if not identical to those of MasterCard’s. Visa is the largest threat to MasterCard, being valued at $100.12 billion, pays out a dividend yielding 0.88%, and carries a price to earnings ratio of 80.20. American Express is valued at $62.98 billion, pays out a dividend yielding 1.42%, and carries a price to earnings ratio of 13.03. Discover is valued at $18.73 billion, pays out a dividend yielding 1.49%, and carries a price to earnings ratio of 8.47. Finally, Capital One is valued at $33.10 billion, pays out a dividend yielding 0.35%, and carries a price to earnings ratio of 9.45.

The Foolish Bottom Line:

MasterCard is a perfect investment in all aspects except one, its pricy valuation. The company possesses accelerated revenue growth, double digit margins, a growing dividend, virtually no debt, an impeccable business model, and a predictable future filled with opportunity and growth. Despite the company’s high valuation, MasterCard is a tremendous addition to any portfolio that values growth and financial strength.   


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of MasterCard. Motley Fool newsletter services recommend American Express Company and Visa. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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