Revenues up 21.6% – With Room to Run

It’s Friday. Time to give you a stock pick from our sister newsletter, The Spill, so you can think about it over the weekend and maybe make a move Monday morning. While The Juice helps you be better with money across the board, The Spill focuses on stocks financial pros are researching and judges how good of buys they are.

Fear and uncertainty are dominating the start of 2023. 

Investors have been searching for recession-proof stocks. While that typically means consumer-staple names like Walmart (WMT) or Kroger (KR), it can extend to some unusual places.

One name that caught our attention in Trackstar, our proprietary sentiment indicator, is Mastercard (MA). 

Financial pros have recently searched it 3x more than American Express (AXP) and 17x more than Discover Financial Services (DFS). 

Mastercard has grown rapidly – 21.6% over the last 12 months. 

It’s increasing its dividend and ramping up its share repurchase program, both shareholder-friendly activities. 

Every time someone uses a Mastercard debit or credit card, the company makes money. 

So we looked into MA to see if it’s a viable investment for 2023.  

Mastercard’s Business

Mastercard is a “tech” company in the global payments industry. 

It provides transaction processing and other payment-related products and services across the globe. 

Mastercard is the U.S.’ second-largest major credit card network, behind Visa (V). 

The company has three main brands: Mastercard, Maestro (a brand of debit and prepaid cards), and Cirrus (an interbank network). 

As of September 30, 2022, its customers had issued 3 billion Mastercard and Maestro cards.

Mastercard makes money by charging processing fees to financial institutions on transactions in its network. The company enables customer transactions in over 150 currencies and more than 210 countries and territories.    

Source: Mastercard

In addition, it generates revenues by switching transactions worldwide when the merchant country and country of issuance are different, allowing account holders to use and merchants to accept its products and services across country borders. 

The company also provides Cyber & Intelligence and Data & Services solutions to its customers, areas of the business that are growing, according to the firm’s Q3 2022 report. 

Like Visa, Mastercard sticks with payment processing and doesn’t offer loans. This keeps it out of the banking business and avoids debt exposure typical of large financial institutions.

Financials 

Source: Stock Analysis 

Mastercard’s cost of revenue has climbed from $3.2 billion in 2018 to $4.4 billion in 2021. But its revenues rose from $14.9 billion to $18.8 billion during that period. 

In margin terms, that’s a jump from 21.5% to 23.4%.

While 2022 has been challenging for many businesses, Mastercard is on pace to post record-high revenues for the year. 

The firm generates $11.2 billion in cash from operations.

One concern investors may have is MA’s climbing debt-to-equity ratio (a company’s liabilities divided by shareholder equity; a lower ratio means a company is better able to cover its debt). It went from 1.1x in 2018 to 2.2x now. 

Management doesn’t seem as concerned. On December 6, the board raised MA’s quarterly dividend to $0.57 per share and announced a new $9 billion share repurchase program.

Valuation

Source: Seeking Alpha

At writing, Mastercard trades at a P/E GAAP (or price-to-earnings generally accepted accounting principles) ratio of 34.5x, its lowest since 2018, when it was at 33.2x. (A higher P/E ratio shows investors are willing to pay more today because they expect more growth to come.)

But MA is relatively rich compared to other credit services businesses. 

For example, V trades at a P/E GAAP ratio of 29.4x, AXP at 14.7x, DFS at 6.3x, and Synchrony Financial Services (SYF) at 5.1x. 

In 2017, MA was trading at a price-to-sales ratio of 12.8x. Currently, it’s at 15.3x. While that’s a considerable drop from 2020’s 23.2x, it’s still relatively high compared to its peers. V is at 14.6x, AXP at 2.2x, DFS at 2.5x, and SYF at 1.9x.

Profitability

Source: Seeking Alpha

One of the reasons Mastercard trades at a high multiple is it incurred higher costs in acquisitions. Management constantly invests in fintech and has established fintech partnerships in 172 countries.  

MA’s high multiple hasn’t affected the company’s profitability. For example, its return on equity is 147.7%, far higher than V at 40.8%, AXP at 31.6%, DFS at 32.1%, and SYF at 24.1%.  

Mastercard’s gross profits have risen from $14.9 billion in 2018 to $21.6 billion over the last 12 months. Its 100% gross profit margin beats V at 97.4%, AXP at 67.6%, and DFS at 95.4%. 

The company’s profit margin of 45.2% is notably higher than AXP at 15.4%, DFS at 40.9%, and SYF at 37.9%, but not as strong as V at 51.0%. 

Growth

Source: Seeking Alpha

For some credit services companies, including Discover and Synchrony, revenue growth has dropped over the last 12 months. MA, however, has grown revenues 21.6% year over year, which is also better than V at 21.5% and AXP at 20.5%.

MA’s gross dollar volume grew 11% to $2.1 trillion in Q3 2022. In addition, cross-border volume grew 44%, and switched transactions grew 9% in Q3 2022. Some of this is due to strong consumer spending and management’s ability to execute its long-term growth strategy. 

Our Opinion 8/10

MA is trading at its lowest P/E ratio since 2018. 

Shoppers continue to utilize their Mastercard debit and credit cards, which reflects positively in the company’s earnings. 

While we wouldn’t call Mastercard a “traditional” recession-proof company, as people spend less during recessions, it should continue to deliver double-digit growth this year. 

Investors can find comfort in buying Mastercard. We like the stock long-term. 

Consider scaling in, building a position now and adding on any dips.

To get content like this daily, sign up for The Spill for free here.

• What Financial Pros Expect in 2023
• 2022: The Start of a Lost Decade
• Where Ray Dalio’s Investing