Is The Market Too Optimistic About Mastercard’s Stock?
Mastercard’s (NYSE: MA) stock has rallied more than 50% since the beginning of 2019 thanks to the payment processors’ strong performance in each of the last three quarters. While the company’s outlook over coming years remains strong, we believe that investors are being too optimistic and estimate the fair value of Mastercard’s stock to be $278 per share – roughly 5% lower than the current market price. Trefis details the key components of Mastercard’s valuation in an interactive dashboard, along with our forecast for full-year 2019.
In Q3 2019, Mastercard’s net revenues grew roughly 15% y-o-y to $4.46 billion, largely driven by a 17% jump in transaction processing revenues followed by 13% growth in cross-border volume fees and 10% increase in domestic assessments. However, the company’s adjusted net interest margin contracted by 260 basis points, falling from 49.8% in Q2 2019 to 47.2% in Q3 2019. Despite the global macroeconomic headwinds surrounding Brexit and the US-China trade deal, Mastercard’s gross dollar volume has seen robust growth in the United States, Asia Pacific, as well as Europe. Also, the company has been on an acquisition spree in 2019 to augment its technological capabilities across multiple product categories, and we expect these acquisitions coupled with steady growth in dollar volume to drive revenues in the fourth quarter.
We arrive at the stock price estimate for Mastercard as:
Stock Price = (Total Revenue x Net Income Margin / Shares Outstanding) x P/E Multiple
Transaction Processing And Domestic Assessment Would Drive Majority Of Growth In Mastercard’s Revenues For Full Year 2019
- Net Revenues have increased 39% from $10.8 billion in 2016 to $15 billion in 2018, and could grow 15% to $17.2 Billion in 2019.
- This growth would mainly be driven by 16% y-o-y jump in transaction processing revenues followed by 15% increase in cross-border payments and domestic assessments division.
- Further, other revenues are expected to add $670 million in Mastercard’s net revenues.
We capture the factors that have driven changes in revenues of Mastercard’s segments over recent years along with our forecast for 2019-2020 in a separate interactive dashboard.
Growth In Net Revenues Coupled With Lower Expenses Would Drive Net Income Figure
- Adjusted Net Income grew from $4.1 billion in 2016 to $5.9 Billion in 2018, and we expect it to be around $7.8 billion in 2019
- Although operating margin decreased from 52.4% in 2016 to 48.2% in 2018 due to higher provisions for litigation, adjusted net income margin increased from 37.7% in 2016 to 39.2% in 2018 driven by the lower effective tax rate.
- Going forward, an estimated 15% growth in net revenues coupled with a 4% drop in operating expenses should drive a 33% jump in adjusted net income in 2019 – helping the adjusted net income margin figure touch 45.1%.
This Lends Support To A $278 Price Estimate For Mastercard’s Shares
- Mastercard has regularly invested in share repurchases to boost shareholder returns and the trend is expected to continue in 2019.
- Lower outstanding shares coupled with higher Net Income figure should result in Mastercard’s EPS figure increasing to $7.61 in 2019.
- Using a 36.5x P/E Multiple on expected 2019 EPS of $7.61, this works out to our price estimate of $278 For Mastercard’s Stock.
Details about how Mastercard’s P/E multiple compares with peers American Express, Discover Financial and Visa is available in our interactive dashboard.
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