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MasterCard: A Steady Wealth Creator
Posted by: Arjun BC (IP Logged)
Date: February 11, 2014 10:49AM

A $1,000 investment in MasterCard (MA) in 2011 would be worth $3,057 today and $1,000 invested in 2009 would be worth $4,700 as on today.

Stock price movement over the years

3years

5 years

Price as on Date 02/08/2014

2/8/2011

2/8/2009

76.31

24.96

16.2

CAGR

45%

36%

$1000 invested would have grown to

1,000

3,057.29

4,710.49

The Business:

MasterCard is a technology company in the global payments industry that connects consumers, financial Institutions, merchants, governments and businesses worldwide, enabling them to use electronic forms of payment instead of cash and checks.

MasterCard makes money by charging issuers and acquirers transaction-based and related fees for the transaction processing and related services provided.

Financials:

CMP

76.31

Market Capitalization

91.82B

Sales

8.35B

EPS

2.56

PE

29.81

Book Value

6.23

Total Yearly Dividend Per share

0.44

Approximate Payout Ratio

17.19%

ROE

43.10%

Sustainable growth [(RoE (1- payout ratio)}

35.69%

Dividend Yield

0.58%

Total Cash

6.3B

Debt to Equity

0

Mastercard is a debt-free company having $6.3 billion in cash. In the last three years the company has had a 15% CAGR in sales and 18% CAGR in operating profit. For the period of nine years we have a 14% and 33% CAGR in sales and profits, respectively. The five-year figure looks little down due to the 2008 crisis.

The company has been giving steady dividends starting in 2006.

Free cash flow has grown at the rate of 35% in the last three years.

The following table shows the sales, profits, cash flow and other financial numbers for the last three years along with the CAGR.

       

2010-13

2004-13

Year

Dec-13

Dec-12

Dec-11

CAGR 3 yrs

CAGR 9 yrs

Sales

8,346.00

7,391.00

6,714.00

15%

14%

Operating profit

4,503.00

3,937.00

2,713.00

18%

33%

Gross profit

8,346.00

7,391.00

6,714.00

15%

14%

EPS

2.56

2.19

1.49

22%

30%

Equity or Book Value

7,484.00

6,917.00

5,868.00

13%

25%

Dividend(amount)

0.29

0.15

0.06

69%

#DIV/0!

Free Cash flow

3,836.00

2,730.00

2,507.00

35%

35%

           

Management

The management has done a good job of capital allocation and both the return on equity and return on capital employed have been above 30%. Very few companies have been able to show such high returns on equity consistently. The company has also been buying back shares and in 2012 authorized a $1.5 billion repurchase of Class A common stock. In the last eight years the company has reduced the outstanding shares by 12%.

It has also been acquiring companies where it makes sense for them to grow the revenue and increase shareholder value. In 2011 MasterCard created a joint venture with Telefónica (TEF) to offer mobile financial solutions in Latin America.

 

Dec-13

Dec-12

Dec-11

 

Return On Equity

41.60

39.90

32.50

 

Return On Capital Employed (%)

41.70

43.16

34.43

 
         

Operating margin (%)

54

53.3

40.4

 

Gross profit margin (%)

100

100

100

 

Net profit margin (%)

37.3

37.3

28.4

 

Long-Term View:

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." - Warren Buffett

In the last three years the earnings have grown at a CAGR of 22%. If we consider a conservative estimate of 18% forward EPS growth rate and a PE of 29 and assumming all goes well and the company earns $15 EPS in the next 10 years, then I believe the stock should be worth $108, which gives us a return of 42% from the current price.

Data source for the article: Annual report and GuruFocus for historical financial info.
Disclosure: My views may be biased as I am invested in this stock.



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Re MasterCard A Steady Wealth Creator
Posted by: ken_hoang (IP Logged)
Date: February 11, 2014 11:47AM

Thanks Arjun for the short and sweet article. MasterCard is definitely a long-term pick for value investors. It was the biggest position in Chuck Akre (Trades, Portfolio) portfolio as of Sep 2013



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Re MasterCard A Steady Wealth Creator
Posted by: asawhneyy (IP Logged)
Date: February 13, 2014 12:16PM

Ajay Banga the CEO has done an excellent job.



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Re MasterCard A Steady Wealth Creator
Posted by: itzarjuna (IP Logged)
Date: February 13, 2014 05:32PM

Thanks Anh , Yes Asawhneyy Ajay Banga has done a great job.



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