MasterCard’s Results are Getting Clipped Due to a Strong Dollar

Stock (Symbol)

MasterCard (MA)

Stock Price


Data is as of
April 4, 2016
Expected to Report
Apr 28
Company Description
mastercard_brandMA is a technology company in the global payments industry. MA connects consumers, financial institutions, merchants, Governments and businesses around the world, enabling them to use electronic forms of payment instead of cash and checks. MA brands include MasterCard, Maestro and Cirrus. It provides offerings, such as loyalty and reward programs, information services and consulting. The Company focuses on segments, including Government programs, such as Social Security payments, unemployment benefits; commercial programs, such as payroll, health savings accounts, employee benefits and others, and consumer reloadable programs for individuals without formal banking relationships and non-traditional users of electronic payments. MA provides a variety of products and solutions that support payment products that customers can offer to their cardholders. Source: Thomson Financial
Sharek’s Take
David SharekMasterCard (MA) is expected to produce mid-teens profit growth long-term, but 2016 is expected to have slower growth due to F/X as well as rebates and incentives MA gives to get new business, which usually occur in the early qtrs of a new deal. Business is good, with gross dollar volumes and processed transactions both rising 12% last qtr. But profit estimates for the next 4 qtrs are : -6%, 5%, 7% and 4%. With MA selling at 27x earnings, it’s at the top end of its ten-year range. Slow profit growth with a high P/E isn’t often a good formula for success. Also, profit estimates have been declining for 4 straight qtrs, with 2016’s number decreasing from $4.12 to $3.53 during that timeOn the plus side the company has a stable business, above average safety and pays a 1% dividend in addition to stock buybacks. I really like MA a lot, but the numbers calculate the stock having a $88 Fair Value.
One Year Chart
MA_2016_Q1MA put out some solid numbers if you take out foreign exchange. Last qtr revenue rose 4%, but increased 9% without F/X. Profit growth would have risen 22% but was pulled down to 14% growth due to the strong dollar. I would love to say growth is back to the teens, but Estimates show otherwise. With the Est LTG at 16% and a 1% yield that makes a combined 17% total annual return (hypothetically), but MA just isn’t doing that right now.
Fair Value
MA_2016_Q1_PHMasterCard management is great about disclosing long-term profit growth goals. In the past management has stated it will hit 20% earnings growth long-term — and it did. Now the goal is mid-teens from 2016-2018 but that will be in the low-end of the range this year. Personally, I have trouble thinking the company can deliver 10% growth in 2016 with 3% growth now expected. Also, notice the stock has a P/E of 27, which is high historically.
Bottom Line
MA_2016_Q1_10yrMasterCard is a core stock holding for investors who desire growth with good degree of safety. But a high valuation and slow profit growth due to F/X keeps me away from owning it at this time. This stock used to deliver 20% growth with a P/E in the teens and now is producing single-digit growth with a P/E in the high-20s. I think MA is a fabulous stock long-term and would like to add it to my portfolios when fundamentals improve.
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