Mastercard: Underperformance Breeds Opportunity

Core Insights - Mastercard has benefited from the pandemic, leading to increased credit card adoption and a shift towards cashless transactions, gaining market share from Visa [2][26] - The stock is currently not at its lowest valuation but presents a compelling entry point due to recent underperformance [3][26] Financial Performance - In the most recent quarter, Mastercard reported a 10% year-over-year growth in gross dollar volume (GDV), with 6% growth in the United States [6][8] - Net revenue grew by 10% year-over-year, or 11% on a currency-neutral basis, with management initially guiding for the low end of low-double-digits [8][12] - Operating income increased by 11% year-over-year, while earnings per share (EPS) grew by 18% year-over-year due to a lower tax rate and share repurchases [12][14] Balance Sheet and Shareholder Returns - Mastercard ended the quarter with $7.3 billion in cash and $13.5 billion in debt, indicating a reasonable leverage ratio compared to $15.8 billion in trailing twelve months EBITDA [14] - The company has actively utilized its balance sheet, spending $2 billion on share repurchases and $616 million on dividends [14] Future Outlook - Management has guided for high-single-digit revenue growth in the second quarter, with consensus estimates for non-GAAP EPS at $3.52, representing 21.8% year-over-year growth [15][16] - For the full year, management expects low-end of low-double-digit revenue growth, maintaining high-end expectations on a currency-neutral basis [16][17] Market Position and Growth Potential - Mastercard is positioned as an underdog compared to Visa, with a strong potential for sustaining double-digit growth due to the ongoing transition to cashless transactions and increasing market share [19][26] - The stock trades at around 15 times sales, below its 5-year average of nearly 17 times, suggesting potential for future appreciation [20][22] Earnings and Valuation - Consensus estimates indicate healthy double-digit earnings growth, outpacing revenue growth due to operating leverage and share repurchases [22][24] - The stock may sustain a 30 times earnings multiple, reflecting the quality of its business model and conservative leverage ratio, implying attractive return potential [24][26]