ModernGraham Valuation: Mastercard Inc. (MA)

moneyCompany Profile (obtained from Google Finance): MasterCard Incorporated (MasterCard) is a global payments and technology company that connects consumers, financial institutions, merchants, Governments and businesses worldwide, enabling them to use electronic forms of payment instead of cash and checks. The Company offers a range of payment solutions that enable its customers and partners to develop and implement credit, debit, prepaid and related payment programs for their customers. Its customers and partners include financial institutions and other entities that act as issuers and acquirers, merchants, Government entities, telecommunications companies and other businesses. MasterCard manages a family of payment brands, including MasterCard, Maestro and Cirrus, which the Company license to its customers for use in their payment programs and solutions. On April 15, 2011, MasterCard acquired the prepaid card program management operations of Travelex Holdings Ltd., since renamed Access Prepaid Worldwide.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $774.70
MG Opinion Fairly Valued
Value Based on 3% Growth $291.77
Value Based on 0% Growth $171.04
Market Implied Growth Rate 15.76%
Net Current Asset Value (NCAV) $37.27
PEmg 40.02
Current Ratio 1.95
PB Ratio 12.66

Balance Sheet – 9/30/2013 

Current Assets $10,559,000,000
Current Liabilities $5,420,000,000
Total Debt $0
Total Assets $13,730,000,000
Intangible Assets $1,756,000,000
Total Liabilities $6,073,000,000
Outstanding Shares 120,370,000

Earnings Per Share

2013 (estimate) $26.03
2012 $21.90
2011 $14.89
2010 $14.09
2009 $11.23
2008 -$1.95
2007 $8.00
2006 $0.37
2005 $2.67
2004 $2.38
2003 -$3.91
2002 $1.35

Earnings Per Share – Modern Graham 

2013 (estimate) $20.12
2012 $15.46
2011 $11.24
2010 $8.39
2009 $5.05
2008 $2.07

Conclusion:

Mastercard Inc. is a company that has demonstrated exceptional growth since the end of the financial crisis.  The company’s EPSmg (normalized earnings) have gone from $2.07 in 2008 to an estimated $20.12 for 2013.  However, the company does not qualify for the Defensive Investor because it does not have the earnings stability or dividend history the investor type requires, and is trading at high PEmg and PB ratios.  The company does qualify for the Enterprising Investor, who is willing to take on more risk than the Defensive Investor through completing further research, as the company passes all five of the requirements of Enterprising Investors.  From a valuation standpoint, the market is currently implying a growth estimate of 15.76%, and while that is above our upper limit for growth, that is still supported by the demonstrated historical earnings growth.  As a result, the company would appear to be fairly valued and Enterprising Investors should feel comfortable taking further steps in research, such as reviewing the ModernGraham Valuation of Visa.

What do you think?  Do you agree that Mastercard Inc. is fairly valued?  Is the company suitable only for Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Mastercard Inc. (MA) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill


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