Digital payment investors are seeing a shift between old-school bank and credit card companies and emerging digital financial payment companies, as consumers turn to their smartphones to make payments for everything from gasoline to groceries.
And while more consumers are weaning off their plastic-sheened credit cards to handle their personal financial transactions, the old credit card guard is far from being on its last legs.
Take a good look at Mastercard Inc (NYSE: MA), which represents an old-school credit card company that is adapting to the times, and is finding success in embracing new technology payment models.
Mastercard’s earnings and revenues were up substantially in 2018, and analysts expect more of the same this year. Additionally, on a year-to-date industry and overall market basis, MA stock is a legitimate outperformer.
Then there’s the fact that Mastercard processes millions of payments every day, getting a piece of the action on each transaction along the way, a reality that whets the appetite of any investor who deems industry competitiveness as a key factor when weighing a stock’s potential value.
So, here’s the question: Should investors come to grips with the fact that old-dog payment providers like Mastercard learn can new tricks?
MA Stock at a Glance
Mastercard finished 2018 trading in the $187 per share range, amid abundant late-December volatility. Analysts don’t seem worried, issuing a consensus one-year target estimate of $233 per share.
Analysts also seem to believe that Mastercard is well-equipped to transition from plastic-based card payments to digital-based payments. In fact, that process seems to be well under way.
“The multi-decade shift from cash and checks to electronic payments should continue to drive strong growth,” says David Togut, an investment banking analyst at Evercore ISI. “We prefer Mastercard over Visa ( V), given higher constant currency revenue growth estimated over the next two years of 15 percent versus 12 percent.”
Togut is especially bullish on MA’s stock price, pegging one-year share growth to $267 per share.
Pros to Buying MA Stock
Mastercard appears to be making significant moves to help fuel its growth, in ways that could be divergent from major card competitors — even the digital-based payment providers.
“Mastercard’s success in their partnerships, with retailers like Kroger ( KR) and other partners like Air France KLM (AFLYY) and HSBC ( HSBC), appear to point to significant opportunities for growth and market share gains,” says Robert Spivey, managing director at Valens Securities in Cambridge, Massachusetts. “MA is also seeing positive trends in their positioning in Asia Pacific, and domestically.”
Mastercard should also benefit from the secular tailwinds in the market from more customers moving away from cash towards card-based transactions, Spivey says.
“Many of the new mobile payment and virtual wallet solutions that many called on to disrupt Mastercard and Visa, such as Venmo, PayPal ( PYPL), Square ( SQ) and others, are actually leading to more, easier, usage of credit cards in transactions, only helping fuel growth,” he says.
A mere glance at the metrics may not reveal how strong Mastercard is right now, and how much the fundamentals of the business have been accelerating, Spivey says. “That’s why the company has significantly outperformed the market the past two years, and why the company may still have upside going forward,” he says.
Others believe MA is an indispensable and central intermediary in the payment ecosystem.
“In our view, this position will enable Mastercard to continue benefiting from the transition of payments to non-cash methods,” says Ian Chun, research analyst at Vontobel Quality Growth. “That provides a secular tailwind that should sustain MA’s long-term earnings growth above the market.”
Buying MA stock is less about identifying short-term trends or inflection points in its business. It’s more about recognizing the company’s fundamental ability to consistently compound its earnings throughout economic cycles, Chun says.
“It’s worth mentioning that MA has been working to expand its addressable market considerably by playing a larger role in processing business-to-business payments, which could translate into long-term upside for its stock,” he adds.
Cons to Buying MA Stock
Despite a soft year for traditional financial services firms, MasterCard performed well in 2018.
MA stock was expected to close the year with earnings per share growth of approximately 40 percent, on revenue growth of 19.5 percent. Estimates for 2019 are equally rosy, with 17 percent bottom-line growth, and with an additional 13 percent in revenue growth, according to estimates from Zacks.com.
Investment analysts cite impressive share-price growth in one- and five-year terms, but some say the stock price may be too inflated in early 2019.
“At year-end, Mastercard’s share price was up about 26 percent for one year and up about 136 percent for five years,” says Michael Osteen, an investment strategist at Port Wren Capital in Beaufort, South Carolina.
Osteen says MA’s one-year revenue growth is up about 24 percent, its one-year operating income growth is up about 23.6 percent, and its one-year free cash flow growth is up about 41 percent. “Also, their operating margin is about 54.8 percent, their ROE is about 90.54 percent and estimated EPS for 2019, and 2020 are projected higher than the EPS (in the trailing 12 months),” he says. “However, with a forward P/E of about 25.06 and a price of about $190, we believe Mastercard is overpriced.”
Additionally, the year-end stock slide that has taken share prices down across the board may not be an anomaly, and could negatively impact Mastercard’s stock price, as well.
“The most important factor affecting Mastercard’s performance in the near term is the state of the broader stock market,” says Craig Thompson, president of Asset Solutions, in Lafayette, Louisiana. “During the most recent bull market, which began March of 2009, MA has performed exceptionally returning over double the returns of the S&P 500.”
That said, Thompson doesn’t believe investors are in a bull market any longer.
“The current market environment has all the hallmarks of a bear market such as global stock market weakness, risk-off assets substantially outperforming risk-on assets, market leading FAANG stocks are getting hammered, and most indexes have seen the proverbial death cross,” he says.
Historically, when the stock market enters a bear market, most stocks become highly correlated and fall with the market. “Consequently, it doesn’t matter how fundamentally strong Mastercard is if we’re in a bear market now,” he says. “If that’s the case, then it will be very hard for MA to provide positive returns.”
The Bottom Line on MA stock
Market experts who cover Mastercard preach patience with the stock, noting that incoming turbulence needs to be ridden out first.
“While I believe that Mastercard is an exceptional stock to own, over the near term it’s most likely going to fall with the market,” Thompson says. “Waiting until we transition out of this period of broad stock market weakness could provide you with a better entry point.”
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