Why MasterCard Stands Above Credit Card Stocks
The fact that nearly half of Americans tote around less than $20 in cash on a daily basis is no doubt cheerful news for American Express (AXP), Capital One Financial (COF), Discover Financial Services (DFS), MasterCard (MA), and Visa (V).
While consumer mobile payment apps continue to struggle to gain traction (Square Wallet having just closed up shop) the major credit and debit global payments systems are clear beneficiaries of our cash-less tendencies: Nearly eight in 10 of us have less than $50 in our wallets on any given day according to a new Bankrate (RATE) survey.
Interestingly, amid a market that is trading slightly above fair value according to Morningstar (MORN), Capital One is at a 14% discount to fair value, MasterCard currently trades at a 10% discount to Morningstar’s estimate of fair value, and Visa is 5% below its fair value estimate. American Express and Discover trade at or above fair value. (Full disclosure: Morningstar is an investor in YCharts.)
Capital One’s business model includes significant stakes in the straight-up banking world, so it is more of a hybrid credit services firm compared to the others.
For a purer transaction-based plastic story, MasterCard is the best relative value in terms of perceived discount to fair value. And for a stock trading at a 10% discount to fair value in a pricey market MasterCard is anything but a basket case. In the first quarter transactions run through its payments system rose 14% to 9.8 billion, with revenue and net income also rising 14% year over year.
And that’s just continuing a longer-term trend, as strong income and earnings have pushed free cash flow up more than four fold over the past five years.
In terms of valuation, Discover and Capital One trade at much more palatable multiples than MasterCard. That’s because Discover and Capital One are mostly money lenders, and thus acutely vulnerable to the economy’s ups and downs. MasterCard is a payment processor, letting banks that issue its cards take on the lending risk, and reaping an ever-increasing level of fees for itself. In short, MasterCard is a play on consumer spending; Discover and Capital One are plays on consumer creditworthiness.
If its multiple gives you pause, MasterCard is a smart stock to keep an eye on for a possible pounce at the first sign of market weakness. But keep in mind there’s a bit of analytical logic behind that higher multiple.
MasterCard leads on return on equity (ROE):
Visa bests MasterCard’s operating margin, but both clearly set the pace for the industry group.
Trading at slightly larger discount to estimated fair value than Visa, MasterCard fits the bill of a great company selling at a fair price. Which as Mr. Buffett points out is preferable to a fair company selling at a great price. Unleash some Financial Advisor Tools to learn more. YCharts has also in recent weeks looked at eBay (EBAY) and its PayPal payments operation, and at the activity in stock buybacks at American Express.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at email@example.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.