Company Overview: Mastercard Incorporated (NYSE: MA) is a payments technology company that operates across 210 countries and territories and deals across 150 currencies. The company generates its revenue from gross dollar volume (“GDV”) of activity on the products and charges fees from its customers for providing transaction switching and from other payment-related products and services. The company operates through its well-known brands like Mastercard®, Maestro® and Cirrus®. Other offerings include integrated value-added offerings such as cyber and intelligence products, information and analytics services, consulting, loyalty and reward programs and processing.

MA Details

Decent FY19 Top-line Growth Aided by Increased GDV: Mastercard Incorporated (NYSE: MA) is a technology company which operates in the global payments industry and unites consumers, financial institutions, merchants, governments, digital partners, businesses and other organizations worldwide through its electronic payment solutions. The business provides a platform for an easier and more effective way to transact through an array of payment solutions and services by using its well-known brands like Mastercard®, Maestro® and Cirrus®. The business is organized through its multi-rail network that allows clients and partners to process their domestic and cross-border payment. The system also provides access to its funds and a channel for businesses to receive acumen through the information that is derived from its existing network. The company provides services to more than 150 currencies and operates across 210 countries and territories. The business has a dedicated team to create innovative solutions that meet the needs of consumers and merchants in a digital environment by applying emerging technologies. The activation of the EMV Secure Remote Commerce industry standard enables a faster, more secure checkout experience across web and mobile sites, mobile apps and connected devices.

The period of FY19 was marked by a strong broad-based growth aided by the implementation of its strategy and leveraging its innovative product offerings. Going Forward, the business will focus on its client’s requirements and seek to innovate its product line in order to drive its core growth. The business is looking forward to set out its multi-rail strategy and competencies across the key areas, such as digital, cyber and analytics through its recent acquisitions. The business has extended product-line of integrated value-added offerings such as cyber and intelligence products, information and analytics services, consulting, loyalty and reward programs and processing. The payment solutions offer its customers with choice and flexibility while, the products are designed to guarantee protection and security for the global payments system.

Looking at the past performance over the period of FY15-FY19, the company’s total revenue improved from $9,667 million in FY15 to $16,883 million in FY19, posting a CAGR of 15%. Net Income grew from $3,808 million in FY15 to $8,118 million in FY19, witnessing a robust CAGR of 20.8% over the same period.


Five Year Financial Snapshot (Source: Company Reports)

The business intends to grow its core business globally, which includes expansion of its consumer base and marketing of its products and solutions, followed by boosting its total payment transactions. The business aims to provide effective and efficient payments solutions that cater to the evolving ways people interact and transact across the growing digital economy. The above activities aim at higher merchant activities through several improvements in technology and intend to provide increased productivities and protection.

Revenue Recognition: The company derives its revenues from the gross dollar volume (“GDV”) and through the analysis of its customer’s activities. The company charges a fee to the clients for providing transaction switching and from other payment-related products and services.

Core Products and Services: The company offers a wide range of products and services which include facilities to transact through its core network among the users such as merchants, financial institutions, businesses, governments, etc., globally. Company’s core products comprise – (1) Consumer Credit – provides users credit that enables them to defer payment. (2) Consumer Debit – offers consumers convenient access to funds in deposit and other accounts. Branded debit programs include Mastercard, Maestro, and Cirrus (3) Prepaid- is an electronic payment method that enables users for advance payment, no matter, they previously have had a bank account or a credit history. (4) Commercial - helps large corporations, mid-size companies, small businesses and government entities. Such card offerings comprise travel, small business (debit and credit), purchasing and fleet cards. In FY19 Mastercard-Branded Programs, consumer credit accounted for 41% of the total GDV. Consumer debit and prepaid enjoyed the highest slice of 48% of the total GDV. 

GDV and number of cards featuring brands in 2019 (Source: Company Reports)
 
FY19 Business Highlights for the Period ended 31 December 2019: MA declared its full-year results, wherein net revenue came in at $16,883 million as compared to $14,950 million in FY18. The higher top-line was supported by a 13% growth in the gross dollar volume (GDV) to $6.5 trillion. MA witnessed higher business activities during FY19 which includes a growth from Cyber & Intelligence and Data & Services solutions followed by a 19% increase in other revenues. Cross border volume on a local currency basis grew 16% on y-o-y basis. However, the increase in revenue was partially offset by a rise in rebates and incentives, primarily due to new and renewed agreements and increased volumes. The company reported lower operating expenses of $7,219 million from $7,668 million in the previous financial year due to a cost related to provision for litigation in FY18. Net income stood at $8,118 million, depicting a growth of 39% from FY18.


Key FY19 Financial Highlights (Source: Company Reports)


Key FY19 Business Snapshot (Source: Company Reports)

Q4FY19 Business Highlights: The business reported net revenue of $4,414 million, up 16% on an adjusted basis. Adjusted operating margin stood at 54.4%, improved from 52.3% in Q4FY18. The company reported an adjusted net income of $1,981 million, 23% higher than the previous corresponding period. The quarter was marked by 12% growth in the GDV and 9% growth in the United States while the business grew by 14% from the rest of the world. The cards segment grew by 5% on pcp and stood at $2,615 million. Switched transactions stood at 23.8 billion, witnessing a growth of 19% on pcp.


Key Q4FY19 Financial Highlights (Source: Company Reports)
 

Q4FY19 Segment Wise GDV Highlights (Source: Company Reports)

Key Q4FY19 Business Snapshot (Source: Company Reports)

Recent Update:  Recently, during the fourth quarter of FY19, the company repurchased approximately 3.6 million shares at a price consideration of $1.0 billion and paid $333 million in dividends. On 27^th January 2020, the company repurchased an additional 1.4 million shares at a cost of $438 million, which leaves $7.9 billion remaining under current repurchase program authorizations.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 39.97% of the total shareholding. MasterCard Foundation and The Vanguard Group, Inc. hold the maximum interests in the company at 11.14% and 7.17%, respectively.
 

Top 10 Shareholders (Source: Thomson Reuters)

Key Metrics: The Company reported decent numbers in FY19, wherein MA posted EBITDA margin at 61.3%, higher than the industry median of 19%. Net Margin stood at 47.9% in FY19 was significantly above 38.7% in FY18. Additionally, ROE of the company stood higher at 143.4%, as compared to the industry median of 13.8%.


Key Metrics (Source: Thomson Reuters)


Key Valuation Metrics (Source: Thomson Reuters)

Competition: The company faces competition from the global payment industry including cash and checks, payment networks such as Visa, American Express, JCB, China UnionPay and Discover, among others. The company also competes with ATM and point-of-sale debit networks in various countries.
 
Key Risks: Any change in global regulatory and legislative activity will directly impact the operations of the business. Preferential and protective government actions related to domestic payment services, and regulation of privacy, data, security and the digital economy are among the key risks, the company is exposed to. MA is subject to Anti-Money Laundering, Counter Terrorist Financing, Economic Sanctions and Anti-Corruption regulations.
 
Guidance: For FY20, MA expects revenue to witness a growth of low-teens in percentage terms, while expects an increase in operating expense by high single-digits. FY20 effective tax rate is expected within the range of 17% and 18%. The company recently updated the Q1FY20 net revenue outlook based on the impact of the Coronavirus, wherein it expects net revenue to see a growth in the range of 9% to 10%.
 

FY20 Guidance (Source: Company Reports)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation

Price to Earnings Based Relative Valuation (Source: Thomson Reuters)
 
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation: The stock of MA closed at $269.76 with a market capitalization of $271.14 billion. The stock made a 52-week low and high of $222.84 and $347.25 and is currently trading close to the lower band of its 52-week’s trading range. The stock has corrected by ~18.29% and ~6.95% in the last one month and three months, respectively. The business emphasizes on creating and acquiring differentiated products to provide unique and innovative solutions to support new payment flows and related applications, such as real-time account-based payments and the Mastercard Track™ suite of products. The business offers help to the national and local governments which drive increased financial inclusion and efficiency, eliminates costs, increase transparency to reduce crime and corruption and advance social programs. Considering the aforesaid facts, current trading levels, business prospects, etc., we have valued the stock using Price to Earnings based relative valuation method. For this, we have considered peers like Visa Inc (NYSE: V), PayPal Holdings Inc (NYSE: PYPL), Global Payments Inc (NYSE: GPN), etc., and arrived at a target price which is offering a lower double-digit upside (in % terms). Hence, we give a ‘Buy’ recommendation on the stock at the closing price of $269.76, down 3.85% as on 11^th March 2020.
 
 
MA Daily Technical Chart (Source: Thomson Reuters)

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