MasterCard

Company Background: 

MasterCard is a technology company that provides the infrastructure needed to make electronic payments providing a variety of services in support of the credit, debit and related payment programs. Among their different brands are MasterCard®, MasterCard Electronic™, Maestro® and Cirrus®. The company was founded in 1966 and is based in Purchase, New York.

Although the US is its primary business, it only obtains from there around 32% of its revenue (2019). It has an established presence in Europe, and recently, it has entered in China when it has already reached 8% of the market. On top of that, it is well-positioned in emerging markets ( 150 different currencies), and it is ready to take advantage of the growth of this segment.

Company data (17/04/20)
 Market Capitalization260 Bill $
Revenue FY1916’883 Mill $
EBITDA11.327Bill $
Debt8’527mill $
P/E32

What is the business of the company:

Its business is not to issue card, otherwise, that provide the infrastructure needed to make the payments. Its natural competitor is Visa. They take a small percentage of every transaction processed over their networks. However, American express, even although being in the electronic payments business, it issues cards and loan money to clients. That business is riskier, and that is the reason its PE is much less than the one of MasterCard and Visa.

Mastercard has a smaller size than Visa. However, its growth rate is more significant. Visa grow at 6.6% rate. Meanwhile, MasterCard did it at 14.4% in the last quarter of 2019.

Mastercard made a slew of acquisitions in 2019 alone across data analytics, fraud detection, point-of-sale financing, and cross-border payments. It will allow the company to diversify in different business lines.

Investment Thesis: 

The quality of this business is impressive. Its ROCE is > 50%. It is among the top 3 companies in the world in this aspect. As a result of that, it is understandable to find that Mastercard has a high PE ratio.

During the last ten years, its market share has increased, stealing clients from Visa. It has a strong financial position, and health can allow it to make further investments. Moreover, Mastercard has a relatively small amount of net debt US$0.8 and its revenue stream is highly recurring by nature.

However, the most crucial factor is that Mastercard has a lot of space to growth:

•   Only 13% of transactions in the world today are paid with cards. 

•   Around 93% of the card payments are done in the P2M market (Consumer Credit, Consumer Debit, Pay by Account, Point-of-sale financing.

•   Cash represents 29% of the transactions (mainly in emerging markets)

•   Mastercard entered in China at the beginning of 2019, and it has already obtained 8% of its market share

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Moreover, Mastercard is starting to drive blockchain initiatives in the areas of cross-border B2B payments since 2019. In addition to that, it is implementing AI-powered solutions to prevent fraudulent transactions.

Catalysts: 

Transmission of COVID-19 through coins and notes is going to speed up the expansion of the credit cards in the developing countries. Currently, it is a market of two players. Consequently, an increment in the number of users means an increase in the revenue of MasterCard.

Exponential growth in the population, and particularly in the existing or potential customer segments is a huge growth opportunity for the business organisation.

Valuation: 

  • Revenue diminution around 15% in 2020
  • CAGR of 7% (historic average 11%) from 2022 to 2029. 
  • WACC = 7.18%
  • Terminal growth 3%
  • Capex and working capital in line with sales

Risks: 

  • The payments space is highly competitive – PayPal or new fintech will play an important role in the market in the coming years
  • Recession – it will make people spend less & associated with volatility in the currency of developing countries and minor income
  • Regulation -Data privacy/security – Mastercard can be adversely affected by regulation or security issues
  • Losses due to card frauds – Inherent to the business

Results:

The valuation, following the DCF method and the competitor’s analysis, is 296.77$. This company has indeed been priced much higher before the pandemic, and it can happen again. However, this valuation is the target value we believe, having into account the information available.

Disclaimer: This analysis is not a buy recommendation. It is only my point of view about the expected FCF of the company in the future with the information I have.