The death ofcash is one of the hottest trends on the Street.
With consumers fleeing cash in favor of the convenience ofcredit
anddebit cards, electronic financial transactions and payment
processors continue to see explosive growth.
But while thebullish trend in the industry is universally
acknowledged, the real question is how toprofit .
The undisputedmarket leader in the payment systems industry is
, with amarket cap of $117 billion and reach around the globe.
That provides stability and scales ofeconomy for the company --
but from aninvestment perspective, Visa is past its years of peak
For pure growth, I wrote about small cap
Heartland Payment Systems (
last month. Heartland is an up-and-comer in the payment processor
space, but small caps can be volatile and might not be a good fit
for investors looking for stability.
PayPal also continues to see huge growth, with
fourth-quarterrevenue up 18% from lastyear , to $1.5 billion.
PayPal also gained 5 million active registered accounts in the
period and ended the quarter with 128 million, up 16% from last
year. But operating under
eBay's (Nasdaq: EBAY)
$67 billion umbrella prevents investors from making a pure-play
investment in the company.
That's why investors looking for a great combination of
growth, accessibility and stability should check out
With a market cap of $67 billion, MasterCard is the
second-largest payment processor, operating in more than 150
currencies and 120 countries worldwide. But at about half the
size of Visa, MasterCard offers a unique combination of growth
and stability for investors looking to cash in on the death of
MasterCard is leveraging its leading position in developed
economies tocapitalize on high-growth opportunities inemerging
markets . The company is targeting high-growth markets such as
China, the Middle East and Africa, where transactions volumes
were up 20% in the first quarter compared with just 4% growth in
Thosegains are being driven by a flurry of deals in key
||MasterCard is looking to capitalize on the high-growth
segments of e-commerce and mobile payments with its new
Last month MasterCard inked a deal with China CITIC bank
toissue cards in China and others regions in Asia. MasterCard
also recently announced plans for a strategicpartnership with
Alibaba Group, China's largest e-commerce company.
MasterCard also recently scored another victory in Myanmar,
announcing that one of the Southeast Asian country's largest
banks, Kanbawza Bank, is now accepting MasterCard payments cards
at ATMs across the country. All these dealswill enable MasterCard
to build on its already strong presence in high-growth Asian
MasterCard is also turning to Latin America to cash in on
emerging-market growth. In May, MasterCard announced its DataCash
subsidiary, a global payment processor, was partnering with
Redecard, one of Brazil's largest payment systems companies. The
partnership will provide a comprehensive payment solutions system
for merchants across the entire Brazilian market.
MasterCard has also been aggressive on theacquisition front.
In 2010, MasterCard purchased U.K. payment services company
DataCash Group for $520 million to expand its online business and
build internationalmarket share .
In 2011, MasterCard purchased British currency-exchange
company Travelex for $458 million to build market share in debit,
prepaid and cross-border markets. The prepaid market is on the
cusp of explosive growth, according to Boston Consulting Group,
which projects growth to $840 billion by 2017 from just $37
billion in 2010.
MasterCard is also focused on diversifying its product
portfolio through new products and services, including
e-commerce, mobile payment, prepaid cards, "smart" cards and NFC
(near-field communications) devices to capitalize on the
highest-growth segments of e-commerce and payment processors.
MasterCard's dominant presence in the huge growth market of
payment processors has turned it into a financial powerhouse.
With a low-costbusiness model that incurs little variable
expenses associated with higher transaction volumes, the company
recorded operatingcash flow of $2.95 billion in 2012.
MasterCard carries nolong-term debt , providing incredible
financial flexibility to invest in growth and scale out
itsoperating leverage in years to come. The company's financial
strength supported a $2 billion share buyback in February and
100% annualdividend hikes in 2012 and 2013.
Looking forward,analysts are calling forearnings growth of 16%
in MasterCard's currentfiscal year and 18% in 2014. In the next
five years, analysts are calling for annual earnings growth of
16%, ahead of the industry average of 15%.
Risks to Consider:
Reaching saturation points in developed economies like the
U.S. and Japan, MasterCard's growth will have to be driven by
international and emerging markets. Weakness in the global
economy will have a much bigger impact on these less-developed
economies and consumer habits.
Action to Take -->
In spite of MasterCard more than doubling in the past two
years,shares still look fairly valued, trading with a forwardP/E
(price-to-earnings) ratio of 22 times, a slight premium to its
10-year average of 20 times and the industry average of 19.
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