MasterCard Inc. (MA) - Risks to Global Growth
Mastercard (MA) has been an incredible success story with a current return of over 375% from its $39 IPO price in May of 2006. The returns are largely due to the company’s aggressive expansion overseas as developing nations jump on the bandwagon of making payments with plastic instead of cash. Mastercard has been so successful with their International growth that domestic sales now only account for 45% of total transaction volume.
A falling US currency has provided quite a tailwind as these international transaction revenues are being translated to dollars for reporting purposes at very attractive rates. One could argue that a significant portion of the increase in revenue can be attributed to this currency translation which calls into question just how much of future expected earnings growth also prices in dollar weakness. As the dollar begins to find some support and may be mounting a counter-cyclical-trend rebound, investors may be caught off guard if MA revenues do not show the same increases which have previously been present due to the currency issue.
In digging up information on Mastercard, I was surprised to find out how many analysts were truly bullish on the firm. It is often tough to get a straight opinion from these sources because a big firm like MA will likely have huge underwriting needs and analysts are uncomfortable giving anything but a positive report so as to avoid disqualifying their firm for investment banking revenues down the line. The problem with this is that many large firm’s customers will be directed to buy this stock and may not be aware of the risks that are inherent with this business.
When speaking of risks, it is important to note that MA does not have material exposure to credit risk, liquidity risk, or interest rate risk. Analysts make this very clear in their reports and offer investors a false sense of security. Since these three risks are the ones most likely to pull traditional financial companies down, it is comforting to know that they are not important when discussing Mastercard. However, Mastercard bears a large amount of risk associated with a decline in consumer activity. This risk cannot be understated as US consumers are facing tighter and tighter revolving credit restrictions, and international markets are already well into a heavily reported economic boom. It seems that all the good news is on the table and the unknowns are much more likely to be negative than to surprise on the positive side.
American Express (AMX) recently issued a pre-announcement which spooked the credit card transaction sector. The company disappointed investors by citing weakness in domestic transaction levels and because of this, many transaction based companies saw their stocks get hit. Analysts quickly came to Mastercard’s rescue by stating the comparison was unjustified due to Mastercard’s international exposure. However, 45% of revenue in domestic transactions is nothing to dismiss. And we are currently seeing rising correlation levels between our economy and other emerging market economies. This may not have a long-term effect on MA’s earnings, but it will almost definitely have an effect on the valuation of those earnings. With MA trading at a nearly 20% premium to the transaction processing peers, it appears there is more risk in the stock than many analysts will let on. I would urge caution with these shares and look for other opportunities with better valuations.
FD: Author has a short position in MA
Zach, would you consider doing a piece on recent ipo V M Ware symbol VMW. some players think this is a big deal. VMW is my request…. but there is also a complex sweetner in that EMC owns 90% of the company and value players are buying the VMW shares for even less by owning EMC. VM Ware has a market capitalization of about $30 Billion and an annual sales block of $2 Billion-ish.
January 25th, 2008 at 1:18 pmHey Boris.
I did a piece a while back on EMC and the spinoff - the link is here http://zachstocks.com/2007/09/emc-corp-emc/
I’ll try to review it again in the next week and see if I can come up with more details. For whatever it is worth, I own a small hedged position in VMW
January 25th, 2008 at 3:13 pmIs it reasonable to speculate that people are either in fear of, or actually running out of cash resulting in them wanting to leverage smaller payments toward credit cards or having to lean on credit cards just to make it through this economic downturn? Also, with the uncontrolled spending during a boom, people might have such high balances that they might continue leave those balances to hold on to cash for other cash only payments (ie. house, car). This would create interest profitability.
January 25th, 2008 at 4:08 pmZach, agree with this call for near term. MA is a highly valued stock in a punishing market.
I do have some disagreement on the thesis but we come to the same result (I pared back my holding severely on the 1.5 day “rally”). I do believe the very strapped US consumer is going to be turning to credit cards even more. More transactions = more money for MA. And of course the turn to plastic society overseas. So while you seem to be see just a general pullback in spending (which I can agree with) I think things are so stretched that people will be turning to credit for everyday items: gas, food and I can see people substituting direct withdrawel for things like home heating to credit card method.
With that said, the reality on the ground does not matter.. my main worry is the way stocks have been treated into earnings. Even MSFT could not muster a rally so no matter what MA says or does, I can see people saying “so what, what about the next 6 months? You’re doomed!” etc.
So best to seek shelter for now and let it come in!
January 28th, 2008 at 4:43 am