Mastercard Inc (NYSE:MA) is one of the few companies that delivers its quarterly results either in line with or above the expectations. Rarely, the company disappoints the investors and the Street analysts’ estimations. The company’s stock is also one of the few stocks to witness steady growth. It will also keep growing because of the market conditions and the potential to grow in the coming years. The threat from the new payment system unleashed by the smartphone makers’ apps seems to be receding as they start looking for partners. The concept of a credit card is yet to reach the full potential in some parts of the world. Therefore, there is still potential for upside growth.
Swiping Continues Unabated
Before looking at the opportunities available in emerging markets, a look at the biggest economy in the world will throw some lights on the spending. That will help Mastercard Inc (NYSE:MA) or any other companies issuing credit or debit cards. There is no doubt that the Great Recession has inflicted some unbearable pains to some of the consumers in the United States. Though it was still lingering in the minds of some consumers, it is also a fact that it did not stop them from using their debit or credit cards. In fact, consumers started revolving the credit card debt, indicating that credit off-take from consumers is picking up.
According to data, credit card debt, which forms a significant part of the revolving credit, witnessed an 11.57% annualized growth rate in April. That is the second biggest growth rate witnessed after 2009. Both Mastercard Inc (NYSE:MA), as well as Visa Inc (NYSE:NYSE:V) witnessed purchase volume more than doubling in the credit cards issued in the United States after the year 2000. That only signified the shift towards the usage of the plastic card over cash and some consumers have also taken more debt. The credit card usage in America is the biggest in the world, though the international market is providing brisk growth of late.
Non-Cash Payments
According to the World Payments report for 2014, non-cash payments at the global level advanced 9.4% in 2013. That was primarily because of a 22% jump witnessed in the developing markets. The report was prepared in alliance with Capgemini and Royal Bank of Scotland. Though there was some amount of an underlying uncertainty prevailing over Europe, the purchase volume is predicted to more than double during the next decade. Asia Pacific, as well as the Mideast Africa regions are the most key markets for growth since the penetration level is low. There is a strong need to push the credit cards in these markets to reach higher penetration levels.
Once Mastercard Inc (NYSE:MA) or Visa Inc (NYSE:V) or their participant banks reach increased penetration levels, the non-cash transactions will reach 800 billion in the next decade. Of course, that will be supported by the significant growth in mobile transactions. On top of these, the growth in e-commerce will be a shot in the arm for the cashless transactions to witness strong growth.
Liking For Mastercard
Unlike the financial services provider, neither Visa nor Mastercard was ready to take the credit risk. Both of them operate as a toll road by taking a small percentage of the large number of non-cash transactions from their global network on a day-to-day basis. Mastercard Inc (NYSE:MA) is one of the top companies in Baron’s 500 ranking of biggest public companies. The company’s share is also a big holding in the Janus Balanced Fund, which has a five-star rating for historically outperforming.
The company is an exceptional one with the right kind of mix and the growth is solid, according to Mathew 25 Management founder, Mark Mulholland. The company counted the card processing firm as one of the top holdings in its eponymous mutual fund. He believes that the balance sheet is much better. He also thinks that the A+ rating is not only for its financial profile but also for its management, as well as the quality of its businesses.
Another mutual fund portfolio manager, Hutch Vernon, believes that Mastercard Inc (NYSE:MA) is a wonderful business, requiring only minimal reinvestment. The return is plenty. However, the Brown Advisory Flexible Equity Fund portfolio manager believes that the valuation is not higher than the market average.
Valuation
Mulholland thinks that the share price of Mastercard, around $95, looked fairly priced based on 23 times earnings of 2016. However, he thinks that the stock is cheaper compared to Visa on the same metric, since the Street analysts are expecting EPS to grow 20.1% and 17.8% in 2016 and 2017 respectively.
Aside from all these factors, China is finally opening up the domestic payments clearance to foreign companies, providing further opportunities to grow. The Chinese market is estimated at about $7 trillion that was monopolized by UnionPay. Incidentally, Mastercard Inc (NYSE:MA) struck a deal with UnionPay for co-branding cards five years back. Therefore, the company could be termed in an advantageous position in China to take care of its growth prospects.
If anybody thought that the entry of Apple Inc. (NASDAQ:AAPL)’s Apple Pay or any other wallet would affect the business of Mastercard or Visa, they are not correct. In fact, they were going to be of more help to both the companies. Mobile payment is an extra avenue for the user, who may be using the same credit or debit cards from the two leading service providers.
Conclusion
Investing in Mastercard Inc (NYSE:MA) appears to be a safe bet now. That is because of its business model. The purchase volume dictates its growth in the top line. The company does not have any credit risk like any other financial services provider. Therefore, the more the penetration levels the higher the transaction volume. That will translate into more charges, which further translates into earnings growth and stock growth.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.