MasterCard Incorporated (Time to buy?)

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I recalled my post done in Sept 2015 pertaining to MasterCard Incorporated (see below).

There are some things money can’t buy. For everything else, there’s MasterCard. (read here)

After comparing the two companies (Visa & Mastercard), I preferred Mastercard for the following reasons:

  1. Although Profitability wise, the profit margin and operating margin of Visa is higher. However Mastercard has higher ROA and ROE.
  2. If we study the historical profitability performance of Visa and Mastercard, Mastercard consistently beat Visa in the ROA, ROE and ROIC by a huge margin. Even with the debt (of Mastercard), the good ROIC by Mastercard is worth noting.

And I also recalled that back then, the blogger from Tacomob stated that somewhere below 90 USD is a good entry point for him.

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Well, now the stock price of MasterCard Incorporated (MA) is at USD 84.46. This represents an approx. decline of 17% from its peak price of USD 101.5.

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Hence I was wondering if I should start picking up the shares of MA.

 

Let’s do a quick study on the trailing PEG and intrinsic value of MasterCard Incorporated.

1) Trailing PEG

  • P/E: 24.47
  • Dividend Yield (%): 0.93
  • EPS compound growth rate (5 yrs): 18.94%

The trailing PEG will be 24.47/(18.94+0.93) = 1.23. Which is not good (> 1).

2) Intrinsic Value

First let’s look at the estimated 5 years earning growth. We are going to use a time-frame of 5 years from now for this purpose. Given EPS and a PE ratio, stock price can easily be calculated for any company. Using the below formula.

F = P(1+R)N where:

  • F = the future EPS
  • P = the starting (present) EPS (15.09)
  • R = compound growth rate (24.47%. However let’s take a 20% discount, and use 19.576% as I am not really sure if growth can be maintained.)
  • N = number of years in the future (5)

Estimated future EPS: 2.44

I will be estimating the future PE of MasterCard Incorporated to be 25.21 (See below data from Morningstar) – average of the PEs from 2007 to 2015 (I have excluded the PE values of 2006 and 2008 as they appear to be at the extremes).

1

Future Stock Price

P=EPSxPE

  • P = future stock price
  • EPS = future EPS
  • PE = future PE

Hence future stock price of MasterCard Incorporated is 2.44 x 25.21 = 61.51

 

Intrinsic Value

P=F/(1+R)N

  • P = present (intrinsic) value
  • F = future stock price (61.51)
  • R = MARR (15% or 0.15)
  • N = Number of years (5)

Hence, the intrinsic value of MasterCard Incorporated is USD 30.6.

Stock price of MasterCard Incorporated (MA) now (10 Feb 2016) is USD 84.46.  Hence, there is no margin of safety.

 

In gist, basically the calculated trailing PEG and Intrinsic Value shows that the stock price of MA is still overvalued.

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About apenquotes

Born in 1976. Married with 2 kids (a boy and a girl). A typical Singaporean living in a 4 room HDB flat.
This entry was posted in Mastercard, US Stocks. Bookmark the permalink.

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