MasterCard (MA, Financial) 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.
In the first quarter, the company reported EPS of 86 cents, higher than the expectation of analysts which was at 85 cents and now for the second quarter analysts project EPS of 90 cents in a highly volatile market
MasterCard's catalysts
1) MasterCard is enjoying its leverage in the form of expansion and dividends.
In the first quarter the company generated net cash flow from operations of $1 billion compared to $0.9 billion in the previous year’s same quarter. With this the company had total cash including liquid investments at $4.9 billion as of March 31.
MasterCard has comfortable leverage for expansion and acquisitions.
MasterCard deploys its cash flow for dividend, share repurchase, investment in new technology and expansion. It has repurchased 15 million shares at a cost of $1.4 billion. According to the company’s share repurchase program, MasterCard has already purchased another 3 million shares at the cost of $288 million, with $2.9 billion left for more.
2) MasterCard's operating margins improve to 54%.
A major chunk of the transaction comes from the international segments. In its first quarter, the company reported an average benefits increase of 14.5% from partnerships in Asia and Europe compared to the previous year’s first quarter. With the increase of its first-quarter earnings the company achieved operating margin of 54% while its peer American Express (AXP, Financial) Â has an operating margin of 25%; on the other hand Visa (V, Financial) has achieved better margins at 65%.
MasterCard witnessed double-digit growth except in the U.S., where the company is facing stiff competition from the investors who expect more discounts and merchants who want better conditions.
3) Alliances with branded Companies led to a margin of 38% in fiscal 2015.
MasterCard is busy making alliances with some of the branded companies in domestic and international markets to improve its net margin. A few of MasterCard's new partnerships:
- A U.S. deal with General Motors (GM, Financial) will integrate digital enablement systems into GM’s OnStar platform.
- Consumers can directly order groceries through MasterCard's app.
- The company has increased its expansion toward the wearables segment in a partnership with COIN, which is a consumer electronics and financial software company.
- In Australia the company has formed a partnership with a supermarket chain.
- In China it has finalized its deal with one of the largest travel companies, China International Travel Service.
Relative Valuation
Currently MasterCard is trading at 23.3x on a one-year forward earning basis. Its peers are trading at an average of 18.1x. Historically MasterCard traded at a premium to its peers because of its strong brand, increasing partnership, higher growth and better margins.
Start a free seven-day trial of Premium Membership to GuruFocus.
