Before the market opened on Jan. 29, Mastercard Inc. (MA, Financial) reported its earnings for fourth-quarter and full-year 2019.
For the quarter, the credit services company announced revenue of $4.41 billion, net income of $2.10 billion and GAAP diluted earnings per share of $2.07, compared to revenue of $3.8 billion, net income of $0.89 billion and GAAP earnings of 87 cents per share in the prior-year quarter. On average, analysts were predicting revenue of $4.40 billion and earnings of $1.87 per share.
Revenue for the full year was $16.9 billion compared to $15.0 billion in 2018, while net income came in at $8.1 billion compared to $5.9 billion in the prior year and earnings per share were $7.94 compared to $5.60.
The strong growth comes largely from market conditions that encourage spending. In the past, strong bull markets in the U.S. were accompanied by higher interest rates as the Federal Reserve attempted to minimize inflation, but the current bull market has not once seen a Fed target rate above recession levels. Combined with the growing world population and the faster-growing market for credit services and electronic payment solutions, it is perhaps inevitable that big names in the industry will see promising results.
As of Jan. 29, Mastercard has a market cap of $323.26 billion, a price-earnings ratio of 47.98 and a return on capital of 730.23%. Since 2014, the company’s debt has been growing; the cash-debt ratio is 0.76 and the current ratio is 1.39.
Contributors to growth
Over the past three years, Mastercard has grown its revenue by 18.9% per year and its earnings per share without non-recurring items by 18.7% per year. Strong earnings growth has created rarely seen steady increases in it share price. According to the Peter Lynch chart, the company is overvalued, increasing the downside potential in a bear market.
Growth was driven by a 13% increase in transaction volumes to $6.5 trillion compared to the previous year. Cross-border transaction volumes increased 16%, switched transactions increased 19% (indicating that the number of transactions per cardholder increased) and additional revenue from acquisitions increased 2%, primarily in cybersecurity.
By region, the U.S. was the lowest growth region for Mastercard, with revenue from credit and debit increasing 9% compared to 14% for the rest of the world.
Acquisitions
In the fiercely competitive payment processing industry, Mastercard’s brand name and scale give it a crucial advantage. However, in order to keep that advantage, it needs to stay on top of the latest industry developments so that it can provide these solutions to its customer base.
The company primarily achieves this goal through acquisitions. In 2019, Mastercard brought several small, innovative payment processing assets under its umbrella. These assets form part of its value-added products division, which adds services to its core products (credit, prepaid and debit cards).
Mastercard kicked off its 2019 acquisitions journey in March with Ethoca, which identifies and resolves digital fraud such as chargebacks. In April, it bought Vyze to gain access to its point-of-sale financing network, which offers instant credit through a “buy now, pay later” scheme. In July, it added Transfast to provide customers a cheaper alternative to cross-border wire transfers. Mastercard also spent $3.2 billion to acquire Nets’ account-to-account payment business and partnered with prominent blockchain company R3.
Looking forward
For 2020, Mastercard provided guidance for revenue growth in the low teens. It also expects operating expenses to increase in the high single digits and the effective tax rate to increase 17% to 18%.
Since Mastercard’s profits rely on accumulated small charges from transactions and interest from borrowing, both its profits and its stock price have a strong connection to the valuations of the economies that it operates in. The company’s footprint continues to grow faster outside the U.S., which gives it more protection against weak economic conditions in any one country.
FICO recently announced that it will be launching a new individual credit score model, FICO 10, during the summer. The new model will give more weight to a consumer’s account balances and missed payments over the past 24 months, which will most likely result in lower credit scores. This may provide a check on credit borrowing in the U.S., which has increased in part due to low interest rates. Stricter borrowing regulations tend to decrease the number of customers who default on their loans, so the company could see better profits in the U.S. following the change.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful analysis or consult registered investment advisors before taking action in the stock market.
Read more here:
- Kahn Brothers' Biggest 4th-Quarter Buys
- Xerox Surpasses 4th-Quarter Estimates and Continues HP Bid
- Coronavirus Fears Reveal Weakness in the Energy Sector
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
