00:00 Mastercard has been one of the best performing stocks over the last 20 years. Since its IPO
00:05 back in 2006, its share price has risen almost 8000% and the company also pays out a steadily
00:12 increasing dividend. At the current price, Mastercard has a market cap of $358 billion.
00:18 Its got $7 billion of cash and investments and $15.3 billion of long term debt which
00:23 means the enterprise value is $367 billion. Revenue over the last 12 months was almost
00:29 $23 billion. That might seem a little low compared to the market cap but Mastercard
00:34 has an incredibly high and consistent operating margin of 55% and a net margin of 42%. As
00:41 a result, net income over the last 12 months is $11 billion with roughly the same in free
00:46 cash flow and $13.2 billion in EBITDA. So right now Mastercard is valued at 16 times
00:52 revenue, 33 times earnings and 28 times EBITDA. That's slightly above the long term average
00:58 of 30 times earnings. In addition, Mastercard doesn't require a
01:02 lot of capital to be reinvested. CapEx is between $200-$400 million a year. With so
01:07 much free cash flow being generated, Mastercard is able to pay a small dividend and buy back
01:12 a decent amount of shares. Over the last decade, the number of shares outstanding has reduced
01:17 by 20% as management has bought back shares every single year, even 2008.
01:23 So Mastercard is clearly a premium stock but with that comes a premium valuation. Let's
01:28 assume the company grows its revenue at the historical average of 12% for the next 10
01:34 years, then operates with a 40% net income margin. Net income in 10 years time would
01:38 be roughly $28 billion and a 30 times multiple would put the valuation at $840 billion. Include
01:45 dividends and the investment return is a little over 9%.
01:48 That's not a terrible return but there are risks to consider. A new bill in the US is
01:52 trying to tackle excessive credit card fees and break up the Mastercard and Visa duopoly.
01:58 Swipe fees in America average 1.8% which is much higher than in other countries. In Europe
02:03 for example fees are capped at 0.3%. US lawmakers want to change this and drive more competition
02:09 in the sector. However, the majority of swipe fee revenue
02:12 actually goes to the banks. Visa and Mastercard won't necessarily see much of an impact
02:16 on revenue and the infrastructure the two companies have built up gives them a strong
02:21 moat. Even so, increased competition in the space could hurt the long term outlooks for
02:25 the stocks and it's a risk worth watching. Overall, Mastercard is an expensive stock
02:30 but its consistent and reliable qualities make it a decent addition to a portfolio.
02:35 That's why I give the stock a positive rating but these are my personal opinions not financial
02:39 advice and I've got no position in the stock. For more detailed investing ideas make sure
02:44 to visit our website overlookedalpha.com
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