Summary Analysis: Mastercard Inc
Growth company in the financial sector
After Sumitomo Corp & Bunzl, let’s continue on our westwards journey, this time going across the pond to the US to look deeper into a company. This post is going to be a somewhat curtailed post, as the company I am going to write about is an extremely well known company - Mastercard. Mastercard is a technology company in the global payments industry. Some $8.2T worth of transactions were processed through the Mastercard network in 2022.
Mastercard is a technology company in the global payments industry. Mastercard enables easier and efficient payments through wide range of payment solutions and services using a family of well-known and trusted brands, including Mastercard®, Maestro® and Cirrus®.
While payments and transactions are Mastercard’s core business, they have also built a substantial suite of value-added services including cyber and intelligence solutions to allow all parties to transact easily and with confidence, as well as other services that provide proprietary insights, drawing on their principled use of secure consumer and merchant data.
There are investments in new networks, such as open banking solutions and digital identity capabilities, that are expected to support and strengthen Mastercard’s core offerings in payments and services.
Mastercard’s franchise model sets the standards and ground-rules for their core global payments network that balances value and risk across all stakeholders and allows for interoperability among them.
Mastercard sees their 3 strategic pillars across the 3 areas mentioned above - (a) Payments, (b) Services and (c) New Network Opportunities. Services and New Network opportunities now account for about 35% of revenue.
Payments themselves is distributed across multiple segments with cards and 4-party payments being the core, but also includes Disbursements and Remittances, Commercial Point of Sale, B2B Accounts Payable, Consumer Bill Payments, giving the business diversified streams of revenue.
Given this is such a well researched company and stock, I am going to jump straight to what I see as the investment case. Mastercard squarely falls into the “growth” bucket, if there was ever one. Revenue has been growing at 12% p.a for the past 15 years, while OPAT has been steadily rising, compounding at 15.87% per year.
There was some weakness in 2020, largely attributed to the Covid-19 pandemic.
Cross-border volumes were negatively impacted by the pandemic during 2020 due to a significant decrease in global travel as a result of compliance with travel restrictions and quarantine requirements. While cross-border volumes are still lower compared to prior year periods, these volumes have improved throughout the second half of 2020.
Switched transactions were negatively impacted by the pandemic primarily in the second quarter. Subsequently, switched transactions improved during the third quarter in part due to the global relaxation of both restrictions on business operations and social distancing measures. During the fourth quarter, switched transactions growth slowed slightly as compared to the third quarter.
Diluted EPS & dividend has been growing along at 18.5% and 27% respectively. Both metrics have been turbo charged by a consistent program of share repurchases, reducing outstanding shares from 1.3B (adjusted for 10:1 split in 2014) in 2008 to 971M in 2022. In 2022 alone, the company bought back shares worth $8.8B, on top of the $1.9B returned to shareholders as dividends, representing over 100% of the OPAT ($9.9B)1.
The company is able to aggressively return money to shareholders while retiring shares, and yet is able to grow at a fast clip. It boasts of a decent balance sheet and reasonably good FCF. In essence, the business is a growth machine, that has rewarded shareholders across all the metrics that matter, including share price growth.
Risks
It is not a mystery - the risks this business faces is substantial - especially over a long horizon. From their own Annual Report:
Substantial and intense competition worldwide in the global payments industry may materially and adversely affect our overall business and results of operations.
Disintermediation from stakeholders both within and outside of the payments value chain could harm our business.
Continued intense pricing pressure may materially and adversely affect our overall business and results of operations.
Rapid and significant technological developments and changes could negatively impact our overall business and results of operations or limit our future growth.
The second risk is specifically highlighted with the following commentary:
We compete with ATM and point of sale debit networks in various countries. In addition, in many countries outside of the United States, local debit brands serve as the main domestic brands, while our brands are used mostly to enable cross-border transactions (typically representing a small portion of overall transaction volume). Certain jurisdictions have also created domestic card schemes focused mostly on debit. In addition, several governments are promoting, or considering promoting, local networks for domestic switching.
Think of UPI in India and Alipay/WePay in China. In India, for instance, there are a mere 77M credit cards compared to 940M debit cards, and while Mastercard and Visa have significant market share in the credit card world, they have less than a quarter in the debit card world, rest being RuPay2, and that’s a massive missed opportunity. In addition digital payments in India also step around the need for Mastercard as they mostly use UPI3.
These local systems can often obviate the need for transacting on the Mastercard network and that significantly reduces the scope of growth for the business in some of the largest growing economies of the world. This isn’t limited to just the large countries - Singapore uses NETS, which has been taking away a lot of opportunity from Mastercard (and other global payment providers) too.
Mastercard has obviously been growing a series of value added services, in addition to payments, that today represents about 35% of the revenue stream, but it is not clear to me if Mastercard will be able to gain a significant foothold in a country where it is unable to gain a reasonable market share in payments itself.
In terms of the fourth risk, i.e. technology change, the most obvious change that could disrupt the business would be Crypto - as and when it can gain the scale needed to serve B2C transactions, they could potential challenge the Mastercard world, not only for payments, but obviating some of the value added services needed. There is some early indication that Mastercard could work with Crypto, but it is not clear how much of that would be accretive vs dilutive.
There is also the minor issue of litigation risk from time to time - however, I am not able to ascertain whether these risks are significantly over and beyond what would be par for the course for a company this big, involved in an operation moving so much money.
Not to belabour the list of risks too much, or to get overly and unreasonably pessimistic, the overarching point I am trying to make it that the spectacular growth story behind Mastercard can be curtailed sooner or later and when that happens, the valuations of this company will be significantly challenged, and that’s a nice segue for me to talk about that next.
Valuation
Mastercard trades today at 35x P/E. Market obviously accords a lot of value to the growth Mastercard is bringing to the table - and the stock has consistently traded between 28x and 50x trailing earnings, so 35x is not exactly out of the bound. However, a valuation that seems decent in hindsight, may not always bear to be appropriate in the future.
When the growth moderates, the market is obviously going to provide a big haircut to this stock - and that could very easily be a multiple compression of up to 50%. So, don’t be too disappointed to see a 30-50% drawdown then, at some point of time in the future - a drawdown that might even be a slow & steady decline over multiple quarters as the business presents quarter after quarter of slowing growth.
If and when that happens, the buybacks that the company is doing today at current valuations might seem to be poor choices in hindsight. That said, if the company maintains positive cashflows, and is able to deploy them to buy back shares even when the valuations drop, then shareholders will be served well. The company can hoover up as much ownership as possible, potentially rewarding long-staying shareholders with some respite, but these things can’t be planned and who knows what other uses of cash the company might have to contend with.
Summary
I like this business, both for its current operating characteristics as well as its long term track record of profit generation and capital returns. Given the price of the stock, I wouldn’t be betting a substantial allocation here, but I will continue to pick up some shares here and there and maintaining a prudent allocation.
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Disclaimer: I hold positions in all the tickers mentioned in this post. I am not your financial advisor and bear no fiduciary responsibility. This post is only for educational and entertainment purposes. Do your own due diligence before investing in any securities.
They don’t return over 100% of their OPAT every year - 2022 was a distinct anomaly, but the trend is strong.
There is some evidence that Mastercard might be allowed to participate in UPI - but it is early days - https://economictimes.indiatimes.com/industry/banking/finance/banking/why-indian-banks-want-us-card-networks-like-visa-and-mastercard-to-have-a-share-of-upi-pie/articleshow/97043046.cms
Fantastic article. I think the most important thing here is how long and what rate the growth will continue in the future. I think if one took 10 year view and crunched the numbers we would probably come to a 10 year compounded average growth of 6-7%? So it would be interesting to know what were the levers of growth for last 10 years and are these levers slowing down and at what rate?