Mastercard Incorporated (MA) Valuation Report
Market Cap
$419B
Enterprise Value
$427B
Price
$453.86 -0.9%
Intrinsic Value
$178B
Value Per Share
$190 -58%
Price Target
$222 -51%
Dividend Yield
0.6%
Adjusted Yield
2.4%
| TTM | Growth | Margin | Ratio | Yield | |
|---|---|---|---|---|---|
| Revenue | $26B | 12.6% | 16.6x | ||
| Gross | $21B | 20.7% | 81.3% | 20.4x | |
| EBITDA | $16B | 13.2% | 61.0% | 27.2x | |
| EBIT | $15B | 17.4% | 57.8% | 28.7x | 3.5% |
| Profit | $12B | 22.6% | 46.1% | 35.3x | 2.8% |
| FCFF | $9.7B | -3.2% | 37.9% | 43.8x | 2.3% |
| FCFE | $9.8B | -6.9% | 40.1% | 42.9x | 2.3% |
| Cost of Equity = 9.1%
| | Currency:
USD | | ||||
Sector: Financial Services | Industry: Financial - Credit Services | Read more...
Mastercard Incorporated, a technology company, provides transaction processing and other payment-related products and services in the United States and internationally.
It facilitates the processing of payment transactions, including authorization, clearing, and settlement, as well as delivers other payment-related products and services.
The company offers integrated products and value-added services for account holders, merchants, financial institutions, businesses, governments, and other organizations, such as programs that enable issuers to provide consumers with credits to defer payments; prepaid programs and management services; commercial credit and debit payment products and solutions; and payment products and solutions that allow its customers to access funds in deposit and other accounts.
It also provides value-added products and services comprising cyber and intelligence solutions for parties to transact, as well as proprietary insights, drawing on principled use of consumer, and merchant data services.
In addition, the company offers analytics, test and learn, consulting, managed services, loyalty, processing, and payment gateway solutions for e-commerce merchants.
Further, it provides open banking and digital identity platforms services.
The company offers payment solutions and services under the MasterCard, Maestro, and Cirrus.
Mastercard Incorporated was founded in 1966 and is headquartered in Purchase, New York..
Full-time employees: 33,400 | HQ: Purchase
Website:
https://www.mastercard.com
Valuation
➜ Revenue Growth
➜ EBIT Margins In Year 10
➜ Reinvestment Efficiency
➜ Cost of Capital
MA Valuation Output
Terminal value
$215B
PV Terminal Value
$92B
+ PV FCFF
$94B
= Sum of PV
$186B
+ Cash
$7.7B
- Debt
$16B
= Intrinsic Value
$178B
Value Per Share
$190
Overvalued by 58% vs its $454 Price
1-Year Price Target
$222 (-51%)
| Year | Growth | Sales | EBIT % | EBIT | Tax | NOPAT | Reinvestment | ROIC | FCFF | WACC | PV FCFF |
|---|---|---|---|---|---|---|---|---|---|---|---|
| TTM | 12.6% | $26B | 57.8% | $15B | 17% | $12B | $2.2B | 80% | $9.7B | 8.9% | -- |
| 2024 | 6.5% | $27B | 57.8% | $16B | 17% | $13B | $983M | 81% | $12B | 8.9% | $11B |
| 2025 | 5.0% | $29B | 57.8% | $17B | 17% | $14B | $805M | 81% | $13B | 8.9% | $11B |
| 2026 | 5.0% | $30B | 57.8% | $17B | 17% | $14B | $845M | 81% | $14B | 8.9% | $11B |
| 2027 | 5.0% | $32B | 57.8% | $18B | 17% | $15B | $888M | 81% | $14B | 8.9% | $10B |
| 2028 | 5.0% | $33B | 57.8% | $19B | 17% | $16B | $932M | 81% | $15B | 8.9% | $9.8B |
| 2029 | 4.9% | $35B | 57.8% | $20B | 18% | $16B | $1.2B | 79% | $15B | 8.9% | $9.2B |
| 2030 | 4.8% | $37B | 57.8% | $21B | 20% | $17B | $1.2B | 77% | $16B | 8.9% | $8.7B |
| 2031 | 4.7% | $38B | 57.8% | $22B | 21% | $17B | $1.2B | 75% | $16B | 8.8% | $8.2B |
| 2032 | 4.6% | $40B | 57.8% | $23B | 22% | $18B | $1.3B | 73% | $17B | 8.8% | $7.8B |
| 2033 | 4.5% | $42B | 57.8% | $24B | 24% | $18B | $1.3B | 71% | $17B | 8.8% | $7.3B |
| ♾️ | 4.5% | $44B | 57.8% | $25B | 25% | $19B | $9.7B | 8.8% | $9.3B | 8.8% | -- |
How is MA's expected return calculated?
The expected return is a percent (%) estimate of how much a stock's value will change per year. It is used to calculate MA's 1-year price target by multiplying the stock's present value with (1 + expected return). The expected return is calculated using a stock's risk (cost of capital), excess returns, and dividend yield.
Expected Return = (1 + Cost of Capital) * (Cost of Capital * (1 + ROIC - Cost of
Capital - Dividend Yield))
16.7% = 108.9% * (8.9% * 171.4%)
We exclude dividend payments because they aren't reflected in a stock's price. Note that excess returns are highly dependant on our estimate of invested capital and its return. Neglecting to capitalize expense items such as operating leases, R&D, brand name marketing expenses, may inflate the excess return estimate.
Growth
In the 12 months ending Q1'24 Mastercard Incorporated (MA) grew revenues by 12.6%, from $23B to $26B - indicating a deceleration of revenue growth. MA has a 5-year and 3-year revenue compound annual growth rate (CAGR) of 8.6% and 8.9% respectively.
Revenue Growth Estimates
Bottom Line Growth Estimates
Looking at forward estimates, we can see that the market is pricing-in a 8.9% long-term revenue growth rate, while the financials indicate a future revenue growth rate between 1.2% and 3.4%.
Using the average of these 3 estimates we get a 4.5% long-term revenue growth for MA.
What is MA's sustainable revenue growth?
Similar to fixed vs variable costs, the sustainable growth rate shows how much we can expect the company to grow based on their reinvestment into the business, excluding variable demand and pricing. This rate may be helpful as a long-term baseline for the company.
(MA) has invested $15B in total capital, consisting of $7.3B in book value of equity, plus
$16B in total debt, less
$7.7B in cash & equivalents.
By adding on the average reinvestment of $374M in the last 4 quarters on
a TTM basis to the
$15B capital
base, and applying the current sales to capital ratio of 168.2%, we can expect the company to grow its revenue to $26B, implying growth of 2.4%. However, we assume at least
one gap year for CapEx to transform into growth, so we
divide the rate by 2 and get a
1.2% sustainable revenue growth.
Use your own judgement based on the type of business since it takes time for reinvestment
to yield growth.
What are MA's fundamental revenue & EBIT growth rates?
The fundamental growth rates analyze how much (MA) is reinvesting into the business, adjusted for the quality of those reinvestments to come up with an estimate for a long-term future growth. Both fundamental and sustainable gorwt rate estimates attempt to use fundamentals in estimating growth.
Mastercard Incorporated (MA) has reinvested an average of $374M on a rolling TTM basis, reflecting a reinvestment rate of 3.0%, calculated as:
Reinvestment / (EBIT - Tax)
a.k.a. NOPAT.
By multiplying the reinvestment rate with the return on invested capital (ROIC) we get a long-term
estimate for a growth in EBIT:
3.0% * 80.9% = 2.4% (Reinvestment rate * ROIC)
In order to convert this to a fundamental revenue growth rate, we analyze the relationship between EBIT growth and Revenue growth, and come up with a scaling factor of 137.5%. We then multiply the fundamental EBIT growth estimate by the revenue scaling factor and get an equivalent for a fundamental revenue growth rate of 3.4%.
What FCFF & revenue growth rates is the market pricing-in for MA?
In order to justify the current $419B market capitalization given a 8.9% cost of capital, MA needs to keep growing its un-levered free cash flows by 6.5% across many ( >10 ) years.
MA's market implied FCFF growth rate of 6.5% =
1 + (Enterprise Value * Cost of Capital - FCFF) / (Enterprise Value + FCFF) =
1 + ($427B * 8.9% - $9.7B) / ($427B +
$9.7B) By analyzing the relationship between EBIT growth and revenue growth, we get a scaling factor of 137.5% that we apply to our implied FCFF growth in order to get the market implied revenue growth rate of 8.9%
Margins
In the last three years, Mastercard Incorporated (MA) had an average EBIT margin of 55.3%, and managed to convert 59.1% of it into unlevered free cash flows. Conversely, it had a three-year average profit margin of 45.0%, converting 93.4% into levered free cash flows.
MA's core business seems to be improving, given that their gross margin has increased by 6.1%, from the 3-year average of 76.6%.
Why is MA scaling revenues by 25.3% relative to COGS?
MA grew revenue by 12.6% in the last 12 months, and their COGS changed by -12.6% in the same period. This means that the company is scaling revenues 25.3% better than costs.
A company that has a scaling rate above 1:1 indicates efficient growth that may translate into added value in the bottom line. Conversely, if the rate is lower, e.g. 1:0.9, it shows that while the company managed to grow, their costs increased more than revenues.
Free Cash Flows
Note: cash flows in the table and chart are presented as inflows and outflows, meaning that positive numbers indicate how much a company has taken in, and negatives show how much cash has flown out.
What is included in MA's $357M capital expenditures?
In the last 12 months MA invested $639M in plant property & equipment (PPE) CapEx. By adding the -$282M in acquisition expenses, we get a total CapEx of $357M.
How much is MA reinvesting into the business?
In the last 12 months ending Q1'24, MA made capital expenditures of $357M. By netting out the depreciation of $824M, we get a NetCapEx of -$467M, indicating that the company invested less than it needs to, in order to sustain growth.
Finally, we add on the change in Working Capital of $2.6B, and get a total reinvestment of $2.2B.
By investing more than it depreciates, MA is increasing its future growth assets.
How are MA's $9.7B free cash flows to the firm (FCFF) calculated?
MA's $9,747,000,000.00 Free Cash Flows to the Firm (FCFF) =
$14,861,000,000.00 EBIT
- $2,471,500,000.00 Tax
- $639,000,000.00 Plant Property Equipment
- -$282,000,000.00 Acquisitions
+ $824,000,000.00 Depreciation
+ -$2,622,000,000.00 Change in Working Capital
- $460,000,000.00 Stock Based Compensation
Free Cash Flows to the Firm are important because they indicate how much a company has left
over for all (debt & equity) investors.
It is a measure of the true bottom line for investors, as opposed to earnings and the simplified
version of free cash flows (Cash from operating activities - PPE).
In the last 12 months MA had $9.7B in free cash flows, indicating that the business has managed to create value for investors.
How are MA's $9.8B free cash flows to equity investors (FCFE) calculated?
MA's $9,751,000,000.00 Free Cash Flows to the Equity (FCFE)
=
$11,845,000,000.00 Net Income
- $639,000,000.00 Plant Property Equipment
- -$282,000,000.00 Acquisitions
+ $824,000,000.00 Depreciation
+ -$2,622,000,000.00 Change in Working Capital
+ $15,629,000,000.00 Total Debt today
- $15,568,000,000.00 Total Debt one year ago
Free Cash Flows to the Equity investors show how much the company has left over for
shareholders.
It is an insightful metric when paired with FCFF for analyzing companies that have a lot of debt,
as it can reveal the effect of interest rates on the value of equity.
When compared to FCFF, they should be roughly in-line, else we need to think about what causes the difference. In the last 12 months MA had $9.8B in free cash flows to equity, indicating that the business can return capital in the form of dividends and buybacks.
Returns
How much excess returns (value) is MA creating on average (112%), and how to calculate it?
ROE Excess Returns 153.0%
= Return on Equity - Cost of Equity
ROC Excess Returns
72.0%
= Return on Capital - Cost of Capital
Average Excess Returns = (ROE - Cost of Equity + ROIC - Cost of Capital) / 2 For every 1% of growth in its net and operating income, the value of MA's stock changes by an average of 1.12%.
Excess returns are important because they help us estimate a company's target price.
If you are analyzing a company with a lot of R&D expenses, consider capitalizing them as an asset to get a better ROE & ROC estimate - You can use our automated spreadsheet.
Capital Structure
Dividends & Buybacks
Mastercard Incorporated has transferred a total value of $9.9B to investors in the last 12 months. The required cash return (excluding expected growth) for MA is $19B, or a 4.6% yield in the same period.
With an adjusted payout of 101.8%, MA seems to be spending a potentially unsustainable amount of cash and may require financing if the financials don't improve.
SEC Filings
Latest 10-K (annual reports) and 10-Q (quarterly reports):