mastercard report
TRANSCRIPT
[MasterCard] (NYSE: MA)
Price
Current $539 52 Wk % Chg 9.72%
52 Wk Range $389.9-
546.9
Curr. Vol. 0.381M
15d Avg Vol. 0.518M
Size Mkt Cap (mil) $66,174.6
Ent Val (mil) $61,183.6
Shares Outs (mil) 126
Beta 1.001
Valuation Mean Recomm. Buy
P/E 24.44x
FY1 P/E 21.19x
P/Bk 9.54x
P/CF 23.66x
EV/EBITDA 14.51x
EV/Sales 8.22x
Div Yld N/A
Financials Sales (mil) $66,174.59
5yr Sales Growth 16.4%
Gross Margin 59%
EBITDA (mil) 5,552.05
Earnings (mil) $3,619.47
5yr Erns. Grwth 20.5%
Debt 0
Leverage 0%
Cash (mil) $2,052
OCF (mil) $2,948
FCF (mil) $2,852
Stock Overview:
Price
Latest $199.03
1 Yr Chg (%) 37.24%
52 Wk Range $128-227
Curr. Vol. 2,289,151
10d Avg Vol. 1,000,796
Size
Mkt Val (mil) $12,674.80
Ent. Val (mil) 13,555.48
Shs Out (mil) 769.7
Beta 1.35
Valuation
P/E 7.61x
FY1 P/E 25.6x
P/Bk 2.56x
P/CF 6.26x
P/Sales 2.12x
Javier Hernandez-
Eric Gonzalez
305-218-9426
Investment Research 4/29/2013
BUY MasterCard, Inc. is a global payments solutions company mainly focused on
transactions processing of credit, debit, and other forms of electronic payments
programs.
Price Target:
$581-$622 Investment Thesis:
MasterCard, Inc. is greatly undervalued compared to its peers
In this report we used direct and indirect valuation as well as a
discounted cash flow model. The multiples used were P/B, P/E,
EV/S and EV/EBITDA
MasterCard is the second largest credit card company after Visa
and is globally diversified as well as a leader in emerging
payment systems
MasterCard’s stock has increase ever since they settled their
dispute with merchants and may still not have reached its fair
market price
Political risk stemming from increased regulation of the financial
sector may pose a threat to the valuation
Source: Bloomberg, Yahoo
5-year Historical Price Chart
Company Description
MasterCard, Inc. is a global payments solutions company mainly focused on the transaction processing of
credit, debit, and other forms electronic payments programs. They generate revenues by charging fees to
their customers for providing transaction processing and other payment services.
MasterCard charges the “Issuer” and “Acquirer” based on: Gross Dollar Volume (GDV), transactions
processed, and international transactions processed.
Competitor Firms & Headlines
Competitors
Based off purchase volume the industry leader is Visa followed by MasterCard and American Express.
Visa operates in the same manner as MasterCard whereas American Express’ business model allows them to
also play the role of “Issuer”.
Headlines
MasterCard
MasterCard, Visa, and several banks settled a merchant price-fixing lawsuit for $7.25B. Visa will be
required to pay $4.4B and MasterCard is required to pay $790MM towards the settlement. As a part
of the settlement both companies have agreed to lower their fees by 10 basis points for eight
months. (NBC News, 2012)
MasterCard and Telefonica launched a joint venture called Wanda, a mobile money service that
provides a mobile wallet for consumers in a dozen Latin American markets. (MasterCard Press
Release, 2012)
MasterCard defies Debt Crisis as Europeans boost card spend. While under pressure from France to
cut card payment fees, consumers are increasingly using credit/debit cards. (Bloomberg, 2013)
Visa
According to J.P. Morgan, Visa would benefit from buying Visa Europe Ltd. This report was
released after it became public that Visa is looking into acquiring Visa Europe. (Bloomberg, 2013)
Visa Inc. has been named one of the most ethical companies by Ethisphere Institute. (4-traders,
2013)
Visa announces retirement of John Partridge as president effect March 31, 2013. (Reuters, 2012)
American Express
American Express boosts dividend and plans buyback worth around $800MM. (Bloomberg, 2013)
American Express passed the stress test. (Motley Fool, 2013)
American Express Company and Morgan Stanley announce new co-brand cards. (Reuters, 2012)
Macro-Oriented Industry Analysis
Political: In many developed nations there is increased pressure from governments and politicians to bring
down interchange fees charged by Visa and MasterCard. The Durbin Amendment as a part of the Dodd-
Frank Act lowered swipe fees charged to merchants by the credit card companies. This has caused great
political pressure (and subsequent anti-trust lawsuits) by politicians to force the credit card companies to
permanently lower the interchange fee.
Smaller governments however are huge proponents of credit cards because it allows them to track how cash
is being exchanged. Many nations that have problems with tax evasion have turned to credit card companies
in order to find creative solutions to their problems.
Other countries such as China, Russia, and Ukraine have created laws protecting domestic payment service
providers limiting competition in those nations. While most international transactions are processed by the
credit card company, China Bank handles all cross border transactions involving their credit cards.
Economy: Consumer spending is a large driver of revenue for credit card companies. As a result of the
economic woes in Europe and North America consumer spend growth has decreased. In addition, the
credit card companies charge high fees off processing international transactions. The bad economy has
caused international travel to decrease hurting the credit card companies.
Social Change: MasterCard is engaged in a war on cash. Currently, 85% of the world’s transaction takes
place via cash. India and Brazil have large populations without bank accounts, despite the growing middle
class. As society becomes more and more accustomed to increased technology, electronic payments should
benefit greatly.
Technological Change: The next wave of electronic payment is NFC, where MasterCard is an industry
leader. They have branded their “PayPass” tap n’ go system better than Visa’s “payWave” and American
Express’ “ExpressPay”. MasterCard is currently using PayPass to tap into mobile point of sales (POS) as
well as entering the online click-and-pay space. MasterCard launched a joint pre-paid mobile wallet venture
with Telefonica in Latin America. Currently, PayPal is attempting to join the other credit card companies
and compete in the mobile POS market.
Environment: The payments processing industry does not pose any environmental threats.
Legal Challenges: MasterCard and Visa both just settled a $7.25B merchant class action litigation that
temporarily reduced the interchange fee they charged merchants for the next 8 months creating a drop in
revenue. In addition, the settlement forced both Visa and MasterCard to modify their no-surcharge rule that
disallowed merchants from adding an additional fee to credit card purchases. As of now there haven’t been
any corporations adding surcharges, but a change in policy may make credit cards less desirable to the
consumer.
Merchants are also concerned about the cost of accepting new payment systems and payment devices. There
may be upcoming litigation and regulatory proceedings regarding the cost of NFC expansion.
International Developments: Growth in Asia/Pacific and Latin America has led revenue growth for the
credit card companies. Visa and MasterCard both plan to launch massive advertising campaigns in Brazil
during the World Cup. MasterCard has also expanded “Priceless saCities” in Latin America, a campaign
targeting wealthy individuals.
International markets are very important for MasterCard seeing as 61% of its revenues come from outside
the United States. Currently in Venezuela, corporations are not allowed to take money out of the country.
With the death of Hugo Chavez this law may change and it will be interesting to see how that affects
investments and spending coming in and out of the nation.
Micro-Oriented Industry Analysis
Buyers’ Bargaining Power- High
A significant portion (24%) of MasterCard’s revenue comes from the company’s five largest customers.
Currently MasterCard has had to greatly increase its contra-revenue expense in the form of incentives and
deductions in order to secure new business and maintain old relationships. In addition, MasterCard has
undergone several pricing changes in the past few years in order to maintain its competitiveness against Visa
and MasterCard.
Suppliers’ Bargaining Power- Low
MasterCard has its own networks in nearly all countries with Mexico and China being the exceptions. For
the most part, they do not really have suppliers.
Threat of New Competition- Medium-Low
The two most significant products MasterCard can offer are its global acceptance and its brand. It is very
difficult for a new competitor to enter the space. PayPal is currently trying to enter the in-person payments
processing space. Square and other Smartphone based electronic payment services are also trying to enter
the payments space. For MasterCard, Square represents both a threat and an opportunity seeing that
MasterCard also collects interchange fees from Square transactions when using MasterCard branded cards.
Threat of Substitutes- High
For cardholders, there is very little differentiation between credit cards and most people use credit cards
interchangeably.
Rivalry among existing competitors- High
The payments space is very small and while MasterCard’s biggest competitor is cash sales, in markets like
the United States they are constantly battling Visa and American Express for market share. There is also a
lot of competition for talent among the companies and it is common to see many employees jump from one
firm to another.
Economic Moat
MasterCard can currently process transactions faster than any other network (1.7 times faster than Visa) and
is currently the only payments solutions company that provides triple-layer protection over credit card
transactions.
In addition, MasterCard has great brand reputation as a result of their Priceless campaigns.
Future Opportunities & Growth
Opportunities
MasterCard is positioned as a global leader in NFC mobile payments. According to Frost & Sullivan
they expect 53% of phones to be NFC enabled by 2015. Juniper expects NFC transactions to reach
$74B by 2015.
MasterCard has new innovative technology on the way that may shake up the way payments are
transacted.
The prepaid debit card market has proven successful in Latin America and may do well in other
markets.
Wanda and other mobile prepaid technologies can be expanded into to other markets
CEO Ajay Banga has been named one of the top CEOs by Fortune and has turned the company
around since joining in 2010.
Growth
Currently 85% of the world’s transactions are cash. MasterCard has started what they call a “War on
Cash” and expects significant growth just by convincing more consumers to switch to credit card
transactions.
As emerging markets develop, the underserved banking population may begin switching over to
credit cards.
During their investors’ conference call both the Chief Financial Officer, Martina Hund-Mejean, and
the Head of International Markets, Ann Cairns, mentioned their desire to build the company
through acquisitions of smaller firms whose technology they can integrate with theirs
Business Risk
Company MasterCard Visa American Express
Firm Specific Risk Rising Contra-Revenue will be a concern for the firm’s profitability in the long-run
Large FX risk since most of the revenue is made outside the U.S.
Merchants slow to adapt to new technology
Top five customers account for 24% of revenue
Tax changes on bringing in foreign income
Funds set aside for settlements may not adequately cover cost
Current pending lawsuits would lead to substantial damages
Agreement with Visa Europe forces Visa to pay for all legal claims outside of Europe
Failure to maintain interoperability between Visa & Visa Europe
Adverse capital and credit conditions may affect liquidity
Reduction in credit rating could affect cost of funding
Exposed to significant government regulation and supervision
Cardholders must pay credit card balance in order to recognize revenue
Industry Risk Interchange fees and acceptance practice are under intense regulatory scrutiny worldwide
Information breach or anything affecting the transaction network
Increased competitive pressure has lowered prices
Little differentiation between the firms in the industry
Consumer spending growth has slowed
Recent settlements allow merchants to add a surcharge to credit card purchases
Competitive Summary
Visa is in a very strong position as they have the largest market share in the most profitable market (U.S.).
MasterCard however is uniquely positioned in the global landscape and should see plenty of opportunities in
emerging payments. While MasterCard does compete against Visa and American Express their greatest
growth will come from the decreased use of cash as consumers worldwide begin to adopt credit cards as a
preferred payment system.
Quality of Earnings & Corporate Governance
All of the firms have similar methods of revenue recognition where they recognize revenue only
when the service is delivered, the price is fixed, and collection is reasonably certain.
All firms are growing Capex faster than depreciation
American Express has seen volatile earnings. They operate as an issuing bank so they were faced
with much more regulation than MA or V.
Visa was the only firm with a tax liability instead of a tax benefit.
Operating leases to rent out office space were used by all three firms but they weren’t significant
expenditures.
Unfunded pension liabilities make up a significant expense on V and AXP book.
Goodwill are a significant portion of V assets.
Intangible assets are a significant portion of V assets.
Intangible assets include trademarks, patents, and customer relations.
MA has a significant amount of cash.
All three firms had the exact same CGQ score.
MA has Ajay Banga who has been recognized as one of the top CEOs.
All three firms have great auditing practices and are large enough to avoid being takeover targets.
Quality (Comparability) of Earnings Target MA V AXP
Revenue Recognition AGR, OBJ, CON OBJ OBJ OBJ
Depreciation vs. Capex Dep. < or > or ≈ Capex < Capex <Capex <Capex
EBITDA Growth Rate 5 Year CAGR 28% 38% -4%
YoY EBITDA Growth: Smooth or Volatile Smooth Smooth Volatile
Capitalized Expenses? % Assets 1% 1% 1%
Deferred Tax Liabilities % Assets, both accts. -1% 5% -2%
Operating Leases: describe % of Revenue 0% 1% 0%
Restructuring Charges % of Revenue N/A N/A N/A
Other Financial Characteristics that Can Impact Value MA V AXP
Minority Interest Asset: identify and compare market to book 0% N/A N/A
Minority Interest Claim: identify and describe claim N/A N/A N/A
Unfunded Pension Liability: % of Assets 5% 13% 11%
Employee Options: in or close to the money claims % of shares 0% 0% 0%
Goodwill % of Assets 9% 33% 2%
Goodwill writedown: describe N/A N/A N/A
Other Intangible Assets: Describe % of Assets 5% 32% 0%
Cash & Near Cash items % of Assets 16% 4% 15%
CGQ MA V AXP
CGQ Components: Scaled in Favor of Shareholders 51.79 51.79 51.79
1) Compensation
Exc, Ab Avg, Avg, Fair,
Poorfair poor abv av
2) Board Characteristics exc abv av abv av
3) Audit Characteristics abv av abv av abv av
4) Takeover Defenses exc exc exc
Earnings Restatements? Y or N N N N
Switch Auditor? Y or N N N N
Target or Acquirer
MasterCard has increased its number of acquisitions in the past few years including a major acquisition of
Data Cash for $488.45 million back in 2010. In the past year they have acquired six different companies
including purchasing a larger stake of iZettle AB, a smartphone payments processor.
Sources & Uses of Cash
Source
MasterCard generates the majority of its revenue from processing payment transactions. It has a wide variety
of billing events that it can charge both issuers and acquirers that are all related to how the transaction was
processed. In addition, MasterCard has its own consulting practice called MasterCard advisors that helps
customers find creative solutions to their payments processing problems.
Uses
In order to gain new business MasterCard must provide incentives for banks to issue cards with the
MasterCard brand. They often provide kickbacks and other incentives to banks that can effectively spread
the use of their credit cards. MasterCard also offers incentives for merchants who join their MasterCard
network and make investments in new payment devices.
American Express’ numbers may not be comparable because they also have a banking practice. MasterCard
has a much larger cash position than Visa on a relative basis.
SWOT
Firms MA V AXP
EBITDA/REV 57% 63% 37%
OCF/EBITDA 70% 13% 95%
FCF/EBITDA 68% 7% 86%
Valuation
Direct Equity Valuation
After sorting through the data there were six other companies with similar business operations to
MasterCard Worldwide.
Sorting the companies through estimated 2013 and 2015 revenue growth rate had the highest correlation
between the companies. In addition, Price-to-Earnings and Price-To-Book stood out as the most reliable
metrics.
Using regression analysis, MasterCard’s data was plugged into the equation in order to come up with the
P/E and P/B multiples.
Name MCAP$ Tdebt$ Debt/Mcap Ent Val$ Current Rev$
Hist Growth
in Rev
(Home Curr) GP% EBITDA%
Est.
Rgrowth
2013 (Home
Curr)
Est.
Rgrowth
2014 (Home
Curr)
Discover Financial Services 22.03B $20013M 97% $38920M $8984M 4% N/A 30% -8% 4%
Fidelity National Information Services 11.32B $4558M 45% $15513M $5841M 3% 32% 31% 4% 5%
Alliance Data Systems 7.81B $2891M 40% $9788M $3641M 15% 42% 31% 17% 8%
American Express 72.26B $62287M 98% $112944M $33808M 5% N/A 57% -6% 10%
Fleetcor Technologies 5.88B $647M 15% $6025M $708M 36% N/A 53% 15% 11%
Visa 104.29B $M 0% $99115M $10720M 13% N/A 34% 8% 12%
MasterCard Worldwide 63.11B $M 0% $58680M $7391M 10% N/A 31% 12% 12%
P/E P/B P/OCF P/FCF
2013 0.987462 0.714016 0.537192 0.419725
P/E P/B P/OCF P/FCF
2014 0.643346 0.849364 0.673575 0.601883
P/E P/B P/OCF P/FCF
EBITDA% 0.127189 0.19026 -0.11893 -0.21299
y = 60.878x + 17.363
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
-10% -5% 0% 5% 10% 15% 20%
P
/
E
Rev. Grth 2013 Est.
Credit Card Industry P/E
The regression trend line shows that MasterCard should trade around a P/E multiple of 25x and a P/B
multiple of 8x. From the charts it is clear that P/E is far more correlated than P/B so we assigned a weight
of 95% to the P/E multiple and a weight of 5% to the P/B multiple.
Using analysts’ estimates of 2013 and 2014 earnings per share and book value per share the multiples were
used to create a range of possible values for MasterCard. After assigning the weights the resulting range was
$599-$652 for 2013 and $686-$795 for 2014.
Indirect Valuation
Using the same correlation matrix as before, EV/EBITDA was more correlated with estimated 2013
revenue growth than EV/S. As a result the weights were 80% and 20% respectively.
Using the same regression analysis the resulting multiples for MasterCard was an EV/S multiple of 6x and
an EV/EBITDA multiple of 15x.
Metric Low Range High
P/B 390$ 87$ 476$
P/E 610$ 52$ 662$
Stock Price 2013
Metric Low Range High
P/B 511$ 113$ 624$
P/E 696$ 109$ 804$
Stock Price 2014
EV/S
EV/EBITD
A
2013 0.672648 0.91058
2014 0.640219 0.859581
EBITDA% 0.082419 0.238132
Using a constant cash and diluted shares figure the same high-low range was created for 2013 and 2014.
Metric Low Range High
EV/S 427$ 14$ 441$
EV/EBITDA 602$ 33$ 635$
Stock Price 2013
Metric Low Range High
EV/S 463$ 34$ 498$
EV/EBITDA 661$ 73$ 734$
Stock Price 2014
Using analysts’ estimates of 2013 and 2014 Sales and EBITDA the multiples were used to create a range of
possible values for MasterCard. After assigning the weights the resulting range was $560-$580 for 2013 and
$620-$680 for 2014.
Discounted Cash Flow
MA Inputs 2007 2008 2009 2010 2011 2012 5 Yr.
Revenue 4067.6 4991.6 5098.68 5539 6714 7931 CAGR
23% 2% 9% 21% 18% 14%
EBITDA 1229.15 2060.35 2408.23 2905 3677 4187 Average
EBITDA Margin 30% 41% 47% 52% 55% 53% 46%
Depreciation and Amortization 97.64 112.01 141.38 148 194 230
2% 2% 3% 3% 3% 3%
Other Non Cash Adjustments -332.43 -310.54 408 148 699 279
-8% -6% 8% 3% 10% 4%
Changes in Non-Cash NET Working Capital -81.24 865.67 -633.74 -445 -115 -320 (Pluses are Sources, Minuses are Uses) -2% 17% -12% -8% -2% -4% Includes Short Term Debt
Capex -81.59 -75.63 -56.56 -61 -77 -96 Less Disposals 0 0 0 0 0 0 Net Capex -81.59 -75.63 -56.56 -61 -77 -96
-2% -2% -1% -1% -1% -1%
Based off the DCF Model, MasterCard’s share price should be $656 in 2013 with a possible range between
$562- $688.
Equity Value
655.64$ 6.50% 6.25% 6.00% 5.75% 5.50%
9.00% 1,009$ 933$ 870$ 816$ 770$
9.50% 843$ 792$ 747$ 709$ 675$
10.00% 725$ 688$ 656$ 627$ 602$
10.50% 637$ 609$ 584$ 562$ 543$
11.00% 568$ 546$ 527$ 510$ 494$
WACC Estimate
Based on the previous information I decided to use Bloomberg’s estimate for WACC because it was a more
conservative number than either plain-vanilla CAPM or the Fama-French Model.
Results
Using both the direct and indirect equity valuation method as well as using a discounted cash flow model
the 2013 valuation range is $580-$630 and the 2014 valuation range is $650-745.
Common Inputs Notes
Risk-free rate 3.70% Based on Bloomberg's rates on 10-year US Treasuries
Equity-Risk Premium 5.78% Based on Aswatch Damodoran's calculated risk premium
Beta 1.001 Based on Bloomberg's Raw Beta estimate
Tax Rate 32% Based on Value Line's Income Tax Rate
Cost of Debt
Kd 0.00% MasterCard does not have debt outstanding
Cost of Equity
I. Capital Asset Pricing Model
Inputs
Risk-free rate 3.70%
Equity-risk Premium 5.78%
Beta 1.00
CAPM Ke 9.49%
II. Fama-French Model
Inputs
Equity Risk Premium 5.78%
SEE MA PRICE TAB FOR CALCULATIONS
SMB Premium 1.90%
HML Premium 1.90%
FF Ke 7.55%
Wacc Calculation
Tax Rate 32%
Kd 0.00%
Ke 9.49% Used the highest number.
Debt 0
Equity 65970
Shares Outstanding 124 From Value Line. In Billions
Current Price 532.02 Bloomberg as of 4/24/2013
Total 65970 In Billions
Weights
% Debt 0%
%Equity 100% Bloomberg uses an ERP of 8.43%, using a WACC of 10.1%
WACC 9.49% a more conservative number
2013
2014
Conclusion
The findings from the DCF are in agreement with the findings from the trading comps valuation.
MasterCard appears to be in a unique position to achieve double-digit gains. For this reason I believe
MasterCard is a buy.
Reconciliation
While the 2013 range of $600-$660 would represent double-digit gains from its current market price of
~$510 there is significant concern about upcoming litigation and upcoming regulatory action. While many
analysts believe that the worst legal troubles are behind MasterCard it has taken awhile for the stock to catch
up. MasterCard is uniquely positioned in emerging markets and is considered a leader in the technological
advancements of the payments space. If MasterCard is able to avoid further regulatory scrutiny then the
company’s stock is positioned for great capital gains.
Appendix
DCF Spread Sheet
MasterCard WorldWideCurrent Share
Price $540
DCF Share
Price 655.64$
Operating Assumptions 2013 2014 2015 2016 2017 2018
Current Sales 7,931$ 9,041$ 10,217$ 11,443$ 12,701$ 13,972$
Sales Growth 14% 13% 12% 11% 10%
EBITDA 4,187 4,701 5,211 5,721 6,224 6,706
EBITDA Margin 52% 51% 50% 49% 48%
D&A Plus other non-cash adjustments 509 452 511 572 635 699
As a % of Sales 5% 5% 5% 5% 5%
EBIT 3,678 4,249 4,700 5,149 5,589 6,008
EBIT Margin 47% 46% 45% 44% 43%
Taxes 1,174 1,445 1,598 1,751 1,900 2,043
tax rate 34% 34% 34% 34% 34%
Firm's Free Cash Flow
EBIAT $2,504 $2,805 $3,102 $3,398 $3,688 $3,965
Non-Cash Adjustments 509 452 511 572 635 699
Less Capex (1,788) (90) (102) (114) (127) (140)
Capes as a % of Sales -1% -1% -1% -1% -1%
Changes in NWC 187 (362) (409) (458) (508) (559)
Changes as a % of Sales -4% -4% -4% -4% -4%
Unlevered Free Cash Flow $1,412 $2,805 $3,102 $3,398 $3,688 $3,965
Discounting of Annual Cash Flow
Discount Period (Mid-Year Convention) 1 2 3 4 5
WACC (Bloomberg) 10% 10% 10% 10% 10%
PVLS Factor 0.95 0.87 0.79 0.72 0.65
Present Value of Free Cash Flow to the Firm 2,674$ 2,689$ 2,678$ 2,642$ 2,582$
Continuing Value: H-Model Adjustments
Exit Year FCF $3,965 LT Liabilities 0
Short-Term Growth Rate 0 0
Transition Years 5 (12)
Long-Term normal 0.06 (92)
Going Concern Value 108,545$ 0
Discount Factor 0.62 0
2052
Enterprise Value: 0
Present Value of Free Cash Flow $13,265 0
Present Value of Going Concern 67,398$ 82,611$
% of Enterprise Value 84% 126
Enterprise Value 80,663$ 655.64$
Implied Equity Value
Diluted Shares Outstanding
Implied Share Price
Preferred Stock
Minority Interest
Unfunded Pension Liabilities
Executive Options
Legal Claims
Cash
Long Term Non-Operating Assets
Hidden Assets