Majestic Prospects for MasterCard

November 19, 2006

The frenzied holiday shopping season is just around the corner, and global payment processing company MasterCard is positioned to take full advantage and reward its investors.

MasterCard (MA) stock has more than doubled since its May IPO, but the under-priced stock still has great prospects for continuing an upward trend. The company is a globally recognized brand that serves the vital ecosystem of payment processing. Despite the recent rally in MasterCard stock, the $13 billion market cap severely undervalues the iconic company.

Credit card companies make the bulk of their money from fees charged to merchants each time a credit card transaction occurs. These fees usually involve a base rate plus a certain percentage of the purchase price. In addition to making money off merchants, consumers also pay hefty finance charges on unpaid balances to credit card companies.

MasterCard’s top competitors in the credit card segment are Visa, American Express (AXP), and Discover. Visa is made up of an association of 20,000 financial institutions and is considering an IPO on the heels of MasterCard’s successful offering. Visa has 1.5 billion cards in circulation; almost twice MasterCard’s 800 million.

Discover is operated by a wing of Morgan Stanley (MS), leaving American Express as the only other publicly traded powerhouse for comparison. American Express sports a market cap of $72 billion and a P/E ratio of 21. MasterCard on the other hand only has a $13 billion valuation. The company had a loss in the last fiscal year, but the company has delivered two upbeat earnings reports in its life as a public company.

If this trend of solid financial results continues, the company will have to be valued at a higher market cap. The recent run in shares illustrates that investors have already begun betting on this.

Another factor contributing to the rise in shares is a seal of approval from Jim Cramer (see: Mad Man on Wall Street). On his popular CNBC show Mad Money, Cramer likened MasterCard to the Microsoft (MSFT) of late – “always bringing people’s portfolios higher”. He went on to call it an “irreplaceable franchise” that has “pure organic growth” and “earnings power”. He ended his November 10th bullish analysis by prophesizing that “I think this goes to $150,” while the stock was trading at $89.20.

This was not the end of Cramer’s bullishness. On a November 13th program, he said that MasterCard, along with the New York Stock Exchange (NYX) were “going higher.” Also on November 15th, he called MasterCard “the Jackie Wilson stock, higher and higher.” Cramer does have a shoddy track record with many of his recommendations, but is likely right about this one.

Other forces driving the stock action include a deal that will allow MasterCard to be accepted at Sam’s Club stores, a division of Wal-Mart (WMT). Formerly, Discover was the sole credit card accepted at the chain.

MasterCard is also facing scrutiny from the European Union (EU) over antitrust allegations stemming from misusing uncompetitive markets. MasterCard is being charged with imposing complex interbank fees. The EU argues that 85% of all merchants in EU nations accept MasterCard’s, even though MasterCard only has a 45% market share of physical cards. This setback is unlikely to remove MasterCard from the EU market of over 20 billion card payments annually.

If the EU antitrust case is resolved in a timely manner, MasterCard stock will have additional impetus to rise. Taking a technical look at the stock, it is currently coming down on its 10 day moving average, which has served as a rough support for the stock in the past. The holiday season should see an increase in the number of credit card transactions, and help MasterCard ready another blowout earnings report. MasterCard is a priceless addition to any portfolio.

At the time of publication, Dhinesh Ganapathiappan owned shares of MasterCard.