As Transactions Go Plastic, Mastercard Goes Higher
More transactions are being done with plastic, and that sea-change is a huge win for MasterCard.
While you're living beyond all your means
And the man in the suit has just bought a new car
From the profit he made on your dreams"
-The Low Spark of High Heeled Boys - Traffic
This goes out to fellow Minyan Michael Barock from the Virginia Retirement System. He wrote to me last week and suggested the song reminded him of Angelo Mozilo at Countrywide (CFC).
A couple of things: I am really digging the fact that Classic Rock is in fact not dead, but alive and well in the Commonwealth of Virginia. As for the song itself... released in November of 1971, Low Spark was one of those tunes that Pat St. John or Scott Muni would play when they needed a few minutes to grab a coffee or go to the men's room - the play time of 11 minutes and 35 seconds was ample time to do both and then some. Steve Winwood is touring with Eric Clapton early in 2008, and I would encourage all those out there in Minyanland to find some tickets and check these guys out - not exactly a Blind Faith reunion as I do not think Ginger Baker and Ric Grech are going to be with them - but close enough.
There is a sea-change going on that the lyrics of Low Spark more than just capture. Although the health of the consumer can be debated all day long, there is one phenomena that can not be challenged. More and more transactions are being completed using plastic instead of good old fashioned hard currency. Mastercard (MA) is the one clear winner to all of this.
According to its website, "Mastercard Worldwide is a driving force at the heart of commerce, enabling global transactions and bringing insight into the payments process to make commerce faster, more secure, and more valuable to everyone involved." Notice it makes no mention of extending subprime loans or taking on consumer credit risk. At the core of MA's business, it is a global transaction processing company.
Take a look at the numbers behind post-Thanksgiving's "Cyber Monday." Online sales for the Monday after Thanksgiving rose 21% to $733 mln. Here is where things get interesting for Mastercard, though. The number of actual buyers rose 38% year over year, though the average amount spent per user declined 12%. Bottom line, more transactions equal more revenue for Mastercard. Now the bears have been shooting against this stock as a play to take advantage of a slowing consumer. But frankly, as counterintuitive as it may sound, I do not think Mastercard is a play on the consumer at all. Obviously, a robust consumer is not going to hurt, but the reality of the world is more and transactions are being done with plastic instead of cash, and that sea-change is a huge win for Mastercard.
Naysayers will point to the current valuation as a reason to avoid the stock. Frankly, at 35 times trailing and 30.50 times forward earnings it is easy to see why. Valuation fears have led to more than a few harrowing stock price declines, the most nerve wracking being back over the summer when the stock nose-dived from $170 to $129 from mid July to mid August. But overseas growth should be more than enough to keep its multiple in check.
But Wall Street is finally starting to come around to the story at MA. On November 6th, Mastercard was upgraded to buy from hold at Deutsche Bank with a price target of $250.00 and, twice over the last month or so, Morgan Stanley has made positive comments about the company. The most aggressive shop out there appears to be SunTrust Robinson Humphrey, who on October 31st named Mastercard a top pick and increased its price target to $300 from $185.
The pending $10 bln IPO of Visa filed through JP Morgan (JPM) and Goldman Sachs (GS) may do some strange things to the price action of Mastercard. To that end, Mad Money's Jim Cramer suggested taking some profits in MA on November 16th as he expects a dip on the Visa IPO. I would tend to agree with Jim on this point. But I do feel that Mastercard has to be on your shopping list as we look forward to trading opportunities for 2008. Mastercard is a growth story that is taking advantage of a sea-change that will continue to manifest in the years to come. More commerce over the Internet and less transactions with cash equals huge growth for the guys that process the "plastic transactions."
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