Important Disclaimer: Ken Kam, Marketocracy Data Research's Editor in Chief, also is portfolio manager for mutual and hedge funds advised by a Marketocracy affiliate. Before relying on his opinions, always assume that he, Marketocracy, its affiliates and clients have material financial interests in these stocks and hold or trade them contrary to those opinions. Continue reading for more detailed and important disclosures, disclaimers, limitations and material conflicts of interest.
Ken Kam
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October 05, 2007
Is Mastercard Priceless?
Mastercard has more than tripled since going public in May, 2006 at $46. When I reviewed last week's data from the Strategy Lab Open, I noticed that many of the people who held Mastercard had made it the single largest position in their portfolios. After a rough July and August, Mastercard has been on a tear recently, up about 25% off its recent lows. This made me wonder – do the Strategy Lab Open participants think this streak will continue, or are they getting ready to take some profits?
Since Mastercard is also one of my Best Idea stocks, I saw a golden opportunity to check my thinking with a fairly large group of people who all share an interest in this stock. Nothing vets an idea faster than discussing it with a big group of knowledgeable and interested people.
To begin the discussion, RD80 (Full Post) did a great job of summarizing their business model.
"MA's bread and butter is transaction / processing fees. Everytime someone charges a purchase on a Mastercard, MA gets a little slice of the purchase. The banks, credit unions, etc. that issue the cards collect the interest and other fees and assume the risks that go with extending credit to all of us consumers - priceless business model."
Understanding the business model is important because all of the companies that the conventional wisdom/Wall Street says are "comparables" have a somewhat different business model so its hard to see why Mastercard should be valued at "comparable" multiples.
One of Marketocracy's mFOLIO Masters, rmcduff (Full Post), writes:
"MA was incorrectly priced from the outset, as investors and analysts evaluated the stock as though it was a credit card company. Originally, the few analysts that covered the stock simply lumped MA into a peer group with American Express and a number of other publicly traded credit card firms."
As toma47 (Full Post) notes, “Discover (DFS) and American Express (AXP) are not directly comparable as they have the credit risk of holding customer balances on their books.” Visa, the best comparable, is not yet public.
Ahknaten (Full Post) did a great job putting Mastercard through the typical Wall Street discounted cash flow analysis (as he did with Apple) and decided that its overvalued and "due for a correction."
I conclude that since there are no public companies that are good comparables there is a lot of potential for Wall Street, and thus the conventional wisdom, to be wrong about this stock.
However, that is not enough to make it a "Best Idea" stock. I also want to put my finger on something others are missing that is significant enough to drive a double in two years. In Mastercard's case, what might that be?
Blueskymack (Full Post) sums it up as follows: Mastercard is ubiquitous, has a worldwide acceptance and is not yet popular in countries that may one day grow the business.
But, Mastercard already trades at a P/E of about 29 which implies that the current price already reflects a fair amount of growth. For this to be a good investment now, MA has to grow more than in currently expected. What could be the source of this unexpected growth?
Rmcduff says: Mastercard's Maestro payment processing systems are poised to become the European standard in the near future. Europe is harmonizing its debit systems, and will require banks to clear through just one system by 2010. Visa apparently does not even have the technology or systems in place to provide a competent bid, which makes MA a virtual shoo in for this business.
Rmcduff's excellent long-term track record at Marketocracy is the result of making a lot of judgment calls like this correctly over the last 6 years. That speaks volumes to me about whose judgment I want to pay attention to.
What do you think? Is Mastercard going to harmonize Europe’s debit systems? Is there anything else that can fuel growth beyond what the market expects.
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