Forget Visa: Profit From 'The Death of Cash' With This Financial Powerhouse

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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 Visa ( V ) , 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 growth.

For pure growth, I wrote about small cap Heartland Payment Systems ( HPY ) 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 MasterCard ( MA ) .

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 cash.

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 the U.S.

Thosegains are being driven by a flurry of deals in key emerging markets.

MasterCard is looking to capitalize on the high-growth segments of e-commerce and mobile payments with its new MasterPass app.

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 markets.

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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: HPY , MA , V

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