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Robert Abbott
Robert Abbott
Articles (813)  | Author's Website |

Mastercard: The Payments Processor Has Good and Bad News

Mixed signals in the form of shrinking transactions and an international opportunity

Mastercard Inc. (NYSE:MA) is one of the four major U.S. payment processing companies, second only to Visa (NYSE:V).

When you tap, insert or type out your credit card number online, the data from your card is transmitted to a payment processor. The processor assesses your data to determine if the purchase is within your credit limit, checks for fraud, records the information and undertakes other tasks. Once the processor finishes its work, it transmits the data/information to the bank that issued the card. The bank, in turn, debits your credit card account and credits the merchants account.

Thats a gross oversimplification, but does highlight the need for technology to perform all those electronic tasks almost instantaneously. As a result, Mastercard differentiates itself from its peers by calling itself a technology company.

As Covid-19 and the economic crises take their toll, Mastercard is performing far fewer of those transactions. Investors expect that to pull down the value of the firms stock, and thus have been trimming or selling out their holdings recently. Thats given us a pullback in the share price, as shown in this 10-year chart:

GuruFocus Mastercard 10 year price chart

But the news this year hasnt been all bad. On Feb. 11, the company issued a press release with this news, Mastercard today is pleased to announce that it has received in-principle approval from the Peoples Bank of China (PBOC) to begin formal preparations to set up a domestic bankcard clearing institution in China. It also announced that within a year, the joint venture would be able to apply to the Peoples Bank for formal approval to start domestic bankcard clearing activity.

The news came after U.S.-China trade negotiations created the opening. Mastercard set up a joint venture with the Chinese firm NetsUnion Clearing Corporation. With the Chinese middle class getting close to a half-billion citizens, its obviously an area with high potential for Mastercard and other foreign payment processors, including Visa.

However, American entries wont go unchallenged. There are rumors thatJack Ma, one of the founders of Alibaba (NYSE:BABA) and among the worlds richest people, is stepping up activity with his Ant Financial. Ant is leveraging its widely-used Alipay mobile app to quickly expand its consumer lending business. Rather than issue cards, the app allows customers to get the equivalent of credit card functionality by tapping their smartphones. This approach is reported to align with the preferences of young Chinese consumers to install apps rather than carry credit cards.

Perhaps a credit card processor with strong technological skills can bridge that divide. Considering Mastercards promise as a stock, its obvious to me the company faces immediate troubles, and will continue to do so until economies around the world recover. In the longer term, we can see there is a new opportunity arising in China, the degree of which is impossible to estimate at this point.

Aside from potential future opportunities, we can also examine the companys fundamentals to determine its worthiness as a potential purchase. For that, I will use the Macpherson model, a conservative four-part process for screening prospective stocks. The model uses various ratios and scores to look for a moat, financial strength, profitability and valuation.


Does Mastercard have a strong competitive advantage that will allow it to maintain or grow its margins, and ultimately its profits? The model checks and provides a quantitative answer by looking for companies with a median return on capital (ROC) and a median return on tangible equity (ROTE) of at least 15% over the past 10 years.

  • ROC: The lowest return on capital over the past 10 years was 165.99%, more than 10 times the minimum, so the median is well above the threshold.
  • ROTE: The return on tangible equity median over the past 10 years was 83.59%, again much higher than the threshold.

We can confidently say Mastercard has a wide moa.

Financial strength

The criteria here are a cash-debt ratio of at least 100, which effectively eliminates companies with significant debt, and a GuruFocus profitability rating of at least 9 out of 10:

GuruFocus Mastercard financial strength

  • Cash-debt: Currently at 0.86, which is well short of 100.
  • GuruFocus rating: 6 out of 10, which is below the target as well.

As with Visa, failure to meet the targets does not necessarily mean it is unacceptable for many investors. Mastercard has interest coverage of 39 times and a safe Altman Z-Score of 10.12.


The company gets a full 10 out of 10 rating for profitability, making it a pass for the model. Note the strength of its margins and its ROE (return on equity) in the chart below:

GuruFocus Mastercard profitability


As this screenshot of the GuruFocus discounted cash flow (DCF) calculator displays, the market price is nearly a third above its intrinsic valuation (compared to a 13% overvaluation for Visa).

GuruFocus Mastercard discounted cash flow


According to GuruFocus data, Mastercard had 32 guru investors at the end of 2019, the same as Visa had at the end of March. Its single largest guru holding was that of Tom Russo (Trades, Portfolio) of Gardner Russo & Gardner with 6.3 million shares at the end of 2019. Chuck Akre (Trades, Portfolio) of Akre Capital Management owned the second-largest tranche at 5.3 million, whileWarren Buffett (Trades, Portfolio) of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) held 4.9 million shares (Buffett was also the third-largest holder of Visa stock).

As with Visa, investors had been reducing their holdings until recently:

GuruFocus Mastercard guru buys and sellsInstitutional investors own just under half the shares outstanding, while insiders hold 0.16% of the shares.


In summary, I believe Mastercard is a strong company with a durable moat and high levels of profitability. Its fundamentals are mostly good, the exception being its leverage. At the same time, it has more than ample liquidity.

While there is a short-term challenge with Covid-19 and the resulting economic crises, theres no reason to believe it wont be an outstanding performer again in the medium to long term. The biggest hurdle to investing is its relatively high share price, which is running at nearly a third more than its intrinsic value, putting it out of the sights of many value investors.

Disclosure: I do not own shares in any companies named in the article and do not expect to buy any in the next 72 hours.

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website

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