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In my September 3, 2021 post I disclose the purchase of additional Mastercard Incorporated (MA) shares @ $340.3929/share in one of the 'Core' accounts in the FFJ Portfolio.
On October 26, Visa (V) released Q4 and FY2021 results. The share price of both V and MA plunged so I acquired more shares in both companies on October 27; I disclose the purchase of V shares at $217.40 in this post and the purchase of MA shares at $338.15 in my FFJ Portfolio – October 2021 Report.
Following these additional purchases, MA released Q3 and YTD2022 results on October 28. I now take this opportunity to briefly look at MA's current valuation.
Mastercard - Stock Analysis - Recent Events
I am not prepared to invest directly in any cryptocurrency because I do not know how to value them. I prefer to invest in companies that are positioning themselves to benefit from digital assets becoming more intertwined with everyday activities; MA and V are two such companies.
MA, for example, is making it easier for crypto players to connect to its network. It has signed up several new crypto wallet providers and exchanges in Q3, including Bit2Me, Kanga Exchange, Coinmotion, and CoinJar.
MA's crypto program allows consumers to:
- easily buy crypto assets with their Mastercard;
- spend their crypto balances wherever Mastercard is accepted;
- cash out their proceeds with Mastercard Send; and
- earn rewards in the form of crypto or even NFT (Non-fungible token).
Finicity Acquisition
In June 2020, MA announced its intent to acquire Finicity to integrate Finicity’s complementary technology with MA's existing open banking platform. The purpose of this integration is to enable and safeguard a greater choice of financial services.
This acquisition closed on October 19, 2021.
CipherTrace Acquisition
On September 9, 2021, MA announced its intent to acquire CipherTrace to enhance its capabilities in the field of digital assets; CipherTrace is a leading cryptocurrency intelligence company with insight into more than 900 cryptocurrencies.
This acquisition closed on November 19, 2020.
Aiia Acquisition
On September 7, 2021, MA announced it had agreed to acquire Aiia. Aiia is a leading European open banking technology provider offering a direct connection to banks through a single payment initiation service. This allows customers to develop and launch new digital solutions.
Aiia’s expertise in providing safe and secure data access complements MA’s data responsibility principles. This acquisition intends to reinforce the work led by MA's Finicity team to extend data-related best practices across multiple industries. The connectivity of Aiia in Europe will enable MA to deliver Finicity's credit decisioning and credit scoring applications to European clients. Similarly, the connectivity of Finicity in the U.S. will help deliver the account information services and payment applications of Aiia to U.S. clients.
This acquisition is expected to close by the end of 2021.
Mastercard Installments
In my recent V post I touch upon V's Buy Now, Pay Later (BNPL) Visa Installments Solution.
MA also has a similar offering. Mastercard Installments is its scalable, open loop, buy-now-pay-later solution that enables banks, lenders, fintechs and wallets to seamlessly bring buy-now-pay-later solutions to consumers and merchants at scale and in a secure, tokenized manner. With little to no integration for merchants, this solution:
- avoids the need for lenders to engage merchants one-by-one to roll this out;
- enables merchants to deliver more payment options to more consumers faster.
Consumers will be able to access buy-now-pay-later offers through their bank's mobile banking app at the point of checkout and soon directly through Click to Pay. The embedded power of Finicity will help lenders with credit positioning and enable consumers to easily choose different repayment options. It will power MA's core payments and enable it to provide additional value through services, such as data analytics, loyalty and fraud tools.
In the U.K., MA is partnering with Chase as the preferred debit partner of their new digital retail bank. In Canada, MA has extended its exclusive co-brand with Costco Canada.
Expanding Positions with Fintechs and Mobile Money Providers
MA signed a deal with Autopass in Brazil to issue more than 10 million cards to mass transit users in the Sao Paulo area. This includes contactless acceptance across their subway trains and city buses.
PayPal has extended its PayPal Business Debit card into MA's key European markets. It will also directly leverage Mastercard Send for domestic wallet cash-outs and P2P transactions in the U.S.
MA is partnering with Vodafone in Egypt across all of their mobile money use cases, including cash-outs, P2P and bill payments.
It has expanded its strategic partnership with Yandex in Russia and will be its preferred international partner for all of its fintech initiatives.
Finterra, an innovative market leader that connects U.S. banks and fintechs to get cards and financial products into the market, will leverage MA's digital-first Finicity, Mastercard Send and cybersecurity assets.
In the cybersecurity space, Ethoca (MA acquired it in March 2019) is helping multiple players, such as AT&T and MercadoLibre, to reduce chargebacks.
Banco de Bogotá is using MA's artificial intelligence capabilities to improve consumer experiences, increase profitability and identify new opportunities.
In Europe, NuData Security's (MA acquired it in March 2017) behavioural biometrics is being leveraged to help thousands of new banks authenticate online transactions.
The tourism agencies in Greece and Hungary are using MA's data analytics services to gather greater visibility of trends and drive deeper insights to support their tourism campaigns.
In the UAE, HSBC is leveraging MA's test-and-learn capabilities to innovate, experiment and roll out new products for better customer engagement.
Summary
We see from these multiple initiatives that MA is continually reinvesting in the business to maintain its position as a leader in the current global electronic payment infrastructure.
Mastercard - Stock Analysis - Financial Results
Q3 and YTD2021 Results
Please refer to MA's Q3 and YTD2021 Form 8-K, Form 10-Q and Earnings Presentation. Some of the highlights are:
- Domestic spend continues to improve, even though economies are facing supply chain constraints, rising energy prices and some other inflationary pressures.
- Retail sales (excluding automobiles and gas) were up 5% versus Q3 2020 and up 12% from Q3 2019. Overall European retail sales in Q3 were up 5% versus Q3 2020 and up 6% versus Q3 2019.
- MA has witnessed particular strength in consumer and commercial credit. Debit spend remains elevated although it has moderated in recent weeks in part due to waning stimulus benefits.
- Card-present volumes continue to improve as people are getting out and shopping more. However, MA is still seeing sustained strength in card-not-present spend.
- Cross-border spend returned to 2019 levels in August, driven by improvements in consumer and commercial travel, as well as the ongoing strength of cross-border card-not-present spending excluding travel.
- MA's cross-border travel volumes have improved from 48% of 2019 levels in Q2 2021 to 72% of 2019 levels in Q3 2021.
Mastercard - Stock Analysis - Credit Ratings
MA's current ratings and outlook are:
- Moody's - A1 (stable)
- S&P Global - A+ (stable)
MA's ratings define it as having a STRONG capacity to meet its financial commitments. MA, however, is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
These ratings are acceptable for my conservative nature.
Dividend and Dividend Yield
We see from MA's dividend history that it will be distributing its 4th consecutive $0.44/share quarterly dividend on November 9. With shares trading at ~$348, the ~0.05% dividend yield is relatively similar to when I wrote my September post.
I envision MA will announce in early December a $0.04 - $0.06 per share increase in its quarterly dividend; this will not significantly alter the dividend yield. Investors should likely expect the majority of MA's total potential investor returns to continue to be derived from capital gains.
MA actively repurchases shares with the weighted average diluted outstanding shares having been reduced from 1,284 million in FY2011 to 994 million for the 9 months ended September 30, 2021.
In December 2020 and 2019, MA's Board of Directors approved share repurchase programs authorizing the repurchase up to $6B and $8B, respectively; the program approved in 2020 became effective in August 2021 after completion of the share repurchase program authorized in 2019.
During the nine months ended September 30, 2021, MA repurchased 12.8 million shares for $4.6B at an average price of $360.87.
During Q3, MA repurchased $1.6B worth of stock.
As of September 30, 2021 the remaining authorization was $5.2B.
After quarter-end, MA has repurchased an additional $0.361B through October 25, 2021.
Mastercard - Stock Analysis - Valuation
When I wrote my September 3 post, MA's share price was ~$342.50. FY2021 - FY2023 guidance from the brokers which cover MA was:
- FY2021 - 32 brokers - mean of $8.13 and low/high of $7.86 - $8.47. Using the mean estimate, the forward adjusted diluted PE is ~42.1 and ~41 if I use $8.35.
- FY2022 - 35 brokers - mean of $10.65 and low/high of $10.00 - $11.45. Using the mean estimate, the forward adjusted diluted PE is ~32 and ~30.6 if I use $11.20.
- FY2023 - 24 brokers - mean of $13.10 and low/high of $12.30 - $14.09. Using the mean estimate, the forward adjusted diluted PE is ~26 and ~24.8 if I use $13.80.
Shares are now trading at ~$348 and MA has reported YTD2021 diluted GAAP EPS of $6.35 versus $4.59 YTD2020. If we conservatively estimate MA will generate $2.05 in Q4, then FY2021 diluted GAAP EPS should end up at ~$8.40 This gives us a forward diluted PE of ~41.
By way of comparison, MA's FY2011 - FY2020 diluted PE levels are 20.92, 22.39, 32.98, 29.61, 29.87, 28.52, 35.28, 38.11, 44.30, and 53.59.
YTD2021 adjusted diluted EPS is $6.06 versus $4.78 YTD2020. Using the current ~$348 share price and the current forward adjusted diluted EPS guidance from the brokers which cover MA, the forward adjusted diluted PE levels are:
- FY2021 - 27 brokers - mean of $8.26 and low/high of $8.10 - $8.37. The forward adjusted diluted PE is ~42 using the mean estimate and ~41.6 if I use $8.37.
- FY2022 - 30 brokers - mean of $10.54 and low/high of $9.83 - $11.00. The forward adjusted diluted PE is ~33 using the mean estimate and ~31.6 if I use $11.
- FY2023 - 23 brokers - mean of $12.93 and low/high of $12.37 - $13.93. The forward adjusted diluted PE is ~27 using the mean estimate and ~25 if I use $13.93.
Mastercard - Stock Analysis - Final Thoughts
Cross-border transactions are particularly lucrative for MA and V. These transactions came under pressure due to the fallout from the pandemic and a reduction in global travel; both companies are slowly recovering from the challenging business conditions in 2020.
In addition, strategic acquisitions are being made to benefit from digital assets becoming more intertwined with everyday activities.
Investing directly in digital assets is beyond my circle of competence. I do, however, want to benefit from the evolution of this space and consider my investments in V and MA to be a prudent way in which to participate in the growth of digital assets.
I spent my entire career in the Canadian banking sector and have always admired V and MA. As a testament to how highly I admire these companies, they were my top two holdings when I last analyzed all my holdings (April 2021). I have not subsequently completed a similar review but I know both companies are still my top 2 holdings.
Although MA's valuation is a bit rich I am confident MA will be a far more valuable company several years into the future. I intend to continue to periodically add to my exposure.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long MA and V.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
