This Credit Card Stock Is a Long-Term Buy

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MasterCard (NYSE: MA) is a global technology company and an industry leader in payment systems. Founded in 1966, MasterCard operates the second largest open loop card network in the world. It is a large-cap stock with a market cap of $65 billion, yet did not fail to beat the market index on a consistent basis in the past. This trend is likely to continue in the future. The article ponders upon some of the factors which makes MasterCard a long term buy.

Consistent growth in the past

From launching its IPO in 2006 to March 2013, the annualized return of MasterCard is over 40%. If I take the overall return, it is a huge 1000% that beats even some of the top performers. For growth investors, this is a very satisfying fact. The stock has faltered just twice in 2008 and 2010, the reason being market turmoil. Over the past 1 year, MasterCard has outperformed the S&P 500 with a return of 20% compared to the index’s 15%. Credit card stocks in general have done well, however MasterCard emerged to be the top performer in all aspects – long-term growth, value for money and strong fundamentals.

Strong Q4 results

Pre-tax income increased by 12% in the last quarter. MasterCard has a cash reserve of $5 billion. The debt-to-equity (D/E) ratio is low at 0.74 indicating a minimum amount of leverage in its balance sheet. In the last quarterly results, MasterCard reported better than expected earnings results. Revenue increased by 10% mainly due to volume and transaction growth. The return on equity (TTM) of the stock is a huge 43% compared to the industry’s 16%. That signifies how much value the company has been delivering to its shareholders over the years. MasterCard doubled its quarterly dividend in February and bought back $2 billion worth of its shares. The 5-year average annual dividend yield rate is 17%. However, I am not suggesting this stock as the best pick for dividend investors as the company might compromise its future yield for growth purposes.

Beating the competition

The closest competitor of MasterCard has to be Visa (NYSE: V) with a market cap of $110 billion. Visa and MasterCard are similar in many aspects such as brand equity, strong fundamentals and revenue and EPS growth. However, Visa has provided an annualized return of 21% over the period of last 5 years compared to MasterCard’s 44%. Visa has a relatively higher P/E and P/S ratio indicating that it is trading at a slightly more expensive price than MasterCard. Among the 2 investments, I would prefer MasterCard because of its higher net margin and return on invested capital. Also MasterCard is on the verge of growth momentum in the form of global expansion which gives it a slight edge.

American Express (NYSE: AXP) is another credit card company targeting high net worth individuals. 2012 revenue growth of the company was 6% compared to MasterCard’s 12%. However, American Express offers investors a respectable yield well over 1%. Unlike its competitors, the company carries credit risk on its balance sheet that confirms its lower valuation multiple of 12. Although effective expense management helped its Q1 2013 results, the top line of American Express was disappointing. American Express bought back around $4 billion (7% of market cap) of its stock in 2012 which will give dividend investors a reason to cheer. But the normalization of credit will add significant pressure to its future earnings growth that does not make the stock a long-term pick.

Tremendous future potential for MasterCard

As per the latest conference call, MasterCard is aiming for rapid global expansion. It made an entry into Canada with the launch of the Royal Bank of Canada. The recent partnership with Target brings in an entirely new channel of growth for MasterCard. Moreover, it just tied up with Kenya’s equity bank in an effort to venture into African’s huge untapped banking industry. About 80% of Africa is unbanked and MasterCard, with its wide range of offerings, is looking to empower the African customers. In another update, MasterCard is aggressively promoting PayPass, its mobile solution globally. It is also entering the exciting world of virtual payment systems. Recently it signed a MOU with China CITIC Bank for strategic cooperation in the virtual payments space within and outside China. The Chinese electronic payment market is growing strong and if MasterCard properly leverages on this partnership, it is poised for a huge leap.

Conclusion

MasterCard operates the world’s fastest payment processing network. I see the company reaching new highs on increasing volumes in the near future. MasterCard is one of the more expensive companies, but its premium is well warranted by the consistent growth. The stock has outperformed almost everything, ranging from its peers to the benchmark index. Past performance does not always guarantee future performance, however in MasterCard’s case, I believe it will continue to outperform in the long term.


Tanya Kanodia has no position in any stocks mentioned. The Motley Fool recommends American Express, MasterCard, and Visa. The Motley Fool owns shares of MasterCard. 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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