Category Investments

Stock Pick of the Week : MASTERCARD

19 August 2021 Momentum Securities

This week’s pick: MASTERCARD

About: Mastercard Inc. is an American multinational financial services corporation. Throughout the world, its principal business is to process payments between the banks of merchants and the card-issuing banks or credit unions of the purchasers who use the "Mastercard" brand debit, credit, and prepaid cards to make purchases. Mastercard Worldwide has been a publicly traded company since 2006. Prior to its initial public offering, Mastercard Worldwide was a cooperative owned by the more than 25,000 financial institutions that issue its branded cards.

Nancy Bambo, Momentum Securities analyst shares her insights.

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Our stock pick for the week is a company which operates within the payment space. I'm sure you've used this product or service before, and this company is Mastercard, currently trading at about 362 US dollars per share.

Mastercard is a payment network processor and essentially what it does is facilitate the payment process regarding the movement of funds from the bank account of the party making the payment to the bank account of the party receiving the payment. In terms of how it generates its revenue, it charges a fee based on the gross dollar of value of such transactions.

Mastercard is a strong business, we believe it is well positioned to take advantage of the trend towards a cashless society, which we think is a great opportunity. To put this into perspective, 70% of transactions that occur within emerging markets, excluding China, are still cash based and when it comes to your developed markets, it ranges from nine to 50%.

In terms of its valuation, Mastercard is currently trading at a forward PE of 34 times, which is a 16% premium to its average for PE and it's also a slight premium to its biggest competitor, Visa.

It does however, have the highest forecast EPS growth per annum relative to its peers of over 20% and when it comes to its 12-month consensus price upside, we're looking at about 20%.

Mastercard is both a victim and a beneficiary when it comes to the pandemic, benefiting from the trend towards the cashless society and as a victim to the travel restrictions that have been imposed. This has mainly affected its cross-border volumes division, which historically constituted about 22% of revenue but this has since come down to 14% of revenue as of 2020.

From the second quarter results released recently, we have seen the division improve to about 87% of 2019 levels and this is due to the vaccine roll out and therefor, some ease on restrictions.

Overall, we think Mastercard is a well-managed business that we definitely want to keep an eye on. Given the valuation and the pandemic related uncertainty, we do advocate for buying at lower levels, and from a technical perspective, we think that levels of around 338 to 341 US dollars per share are attractive.

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