Effervescent Growth for Mastercard
The wide-moat firm's high growth and minimal reinvestment are alluring, but shares are rich.
Wide-moat Mastercard (MA) reported a 49% year-over-year increase in earnings per share, helped by a lower corporate tax rate, though operating expense growth actually outpaced a 31% increase in revenue (including the effects of acquisitions and changes in accounting rules) as the company continued to aggressively invest. Adjusted revenue growth, excluding these items, was 20%. We don’t plan to significantly change our fair value estimate. Mastercard generated just over $1 billion in cash flow from operations, returning $1.6 billion in cash to shareholders in the form of dividends and repurchases. We believe Mastercard’s combination of high growth and minimal reinvestment needs makes it one of the most attractive financial services companies we cover but believe its prospects are currently priced into the company’s stock.
Growth continued globally, with gross dollar volumes expanding by double-digit rates in all markets, helped a bit by currency movements. Debit volume expanded faster than credit volumes. Profitable cross-border volume, which expanded at 21%, was a major contributor to revenue growth. Despite increasing competition at the margin in various local markets, we think Mastercard’s ubiquitious international presence will be very difficult to replicate. Furthermore, the rise of e-commerce should enable even more spending across international borders, benefiting the firm.
Operating margin fell slightly, and we continue to believe that investments will continue at a healthy rate as the firm targets newer markets (B2B, for example) and payment technology advances at a rapid rate. We thus think margin expansion will be somewhat limited in the near term.
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Jim Sinegal does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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