The shares of this payment company were recently initiated by Jefferies with a ‘Buy’ rating and were upgraded by UBS to ‘Buy’
Mastercard Incorporated (MA)
From Argus Weekly Staff Report
We are maintaining our BUY rating on Mastercard Incorporated (MA) following 4Q18 earnings, which showed continued strong purchase volumes and growth in both cross-border and processed transactions. Based on healthy cyclical and secular trends in the payment-processing industry, along with historically high operating margins, we believe that Mastercard should trade above its historical average earnings multiple in the mid-20s.
The company’s most recent Investor Day was in September 2017. Management emphasized that it would drive growth by capturing more payment flows through its consumer and commercial cards and virtual cards, leveraging its April 2017 acquisition of VocaLink, targeting the affluent card market, and increasing merchant acceptance. The next Investor Day is expected to be held in September 2019. Three-year (2019-2021) financial goals include a low-teens revenue CAGR, an annual operating margin of at least 50%, and an EPS CAGR in the high-teens.
We like Mastercard’s overall growth story, particularly relative to the broad market, and are maintaining our long-term BUY rating. In our view, the company will continue to benefit from the secular shift from cash to credit cards, driven by the rapid growth of online shopping, the security and convenience of cards, and the opportunity to take advantage of rewards programs. Mastercard should also benefit from growth in emerging markets and expanded merchant acceptance. We are boosting our target price to $233 from $228 on greater confidence in the payment volumes growth outlook.
Mastercard reported adjusted 4Q18 operating earnings of $1.55 per share, up from $1.14 in 4Q17 and above the $1.53 consensus. Payment volumes rose 14% to $1.55 trillion, an acceleration from the 3Q pace of 13%, reflecting strong cyclical and secular trends in the payment-processing industry.
Along with the 4Q18 results, management offered 2019 guidance calling for currency-neutral revenue growth in the low-teens, operating expense growth at the high end of the high single-digits, and an effective tax rate of 19%-20%. Its three-year outlook (for 2019-2021) calls for revenue growth in the low-teens, an operating margin of at least 50%, and compound annual EPS growth in the high-teens.
We look for 13% revenue growth in 2019. A stronger U.S. dollar is expected to provide a modest headwind. (Mastercard generates substantial revenue outside the U.S.). We expect 9% expense growth in 2019, reflecting investments in digital initiatives and data processing, along with efforts to take advantage of the opening of the Chinese card-processing market. However, we expect these factors to result in a higher operating margin in 2019.
We are keeping our 2019 EPS estimate at $7.53, while initiating a 2020 forecast of $8.69, representing about 15% growth in both years.
MA shares trade at 27.9-times our 2019 EPS estimate of $7.53, near the company’s historical average multiple in the mid-20s. Given strong cyclical and secular trends in the payments processing industry, we expect revenue at Mastercard to grow at least at a low-teens rate over the next several years. Operating margins in the high-50% range are also enviable, even if slightly below those of peer Visa Inc. We believe that Mastercard’s overall operating metrics, particularly improved margins, merit a valuation above the stock’s historical average. Our 12-month price target of $233 (raised from $228) implies a multiple of 31-times our 2019 EPS estimate.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, February 8, 2019