Why Did This Super-Investor Sell MasterCard?

MasterCard has some risks, but it sports a lot of upside potential, too.

May 15, 2014 at 5:34PM

The latest 13F season is here, when many money managers issue required reports on their holdings. It can be worthwhile to pay attention, as you might get an investment idea or two by seeing what some major investors have been buying and selling.

For example, consider Lone Pine Capital, founded by Steve Mandel in 1997. Lone Pine's reportable stock portfolio totaled $23 billion in value as of March 31, 2014. According to its recently released 13F statement, Lone Pine sold 23% of its shares of MasterCard Inc (NYSE:MA).

Why might anyone sell MasterCard Inc, and why might others buy or hold it? Let's look at what's going on with the company.

Reasons to buy
There's a lot to like about MasterCard and its line of business. For starters, it's not capital-intensive. For the company to process twice as many transactions, it doesn't have to build twice as many stores or hire twice as many workers. Its business model's lightness shows up in its massive profit margins -- with operating margins topping 50% and net margins topping 35%.

MasterCard is also firing on lots of cylinders, recently posting first-quarter revenue up 14% over year-ago levels and operating income rising 16%. More than 2 billion MasterCard and Maestro cards have been used. Between 2013 and 2015, management aims to grow revenue by 11%-14% annually and EPS by 20%. CEO Ajay Banga added:

We secured several new agreements, including three of the largest retailers. Wal-Mart and Sam's Club will flip their co-brand portfolios to MasterCard. Target will also shift its co-brand to MasterCard.

Despite MasterCard's size, it has plenty of room to grow, as 85% of the world's retail transactions are still conducted with cash. Even Japan's economy remains largely cash-based, with consumer payment card penetration at just 14% as MasterCard and Visa (NYSE:V) try to boost their presence there.

The company is looking more and more shareholder-friendly, too. Its dividend only yields 0.6%, but its payout has been growing by nearly 30% annually, on average, over the past five years. (Its most recent increase was a whopping 83%.) Management also plans to buy back up to $3.5 billion worth of shares. MasterCard's stock valuation may not be a screaming bargain, but it's still appealing, given the quality of the company. Its forward-looking P/E ratio is around 20, below its five-year average of nearly 24.

Reasons to sell
Here are some reasons why you might not want to hold MasterCard, some of which may be why Lone Pine shed so many shares

Competition is intensifying on a number of fronts. Visa is the usual suspect, and eBay's (NASDAQ:EBAY) PayPal has been growing its share in recent years, too. You might think of PayPal as a payment system entrenched in the online world, but it's making inroads in the brick-and-mortar retail arena as well. In eBay's first quarter, it reported that PayPal tacked on 5.8 million new registered active users for a total of 148 million, up 16% over year-ago levels.

Meanwhile some unexpected names in telecom, retailing, and elsewhere want a piece of the pie, too. AT&TT-Mobile, and Verizon, for example, are developing mobile-payment technology, while CVS, Wal-Mart, ExxonMobil, and others are banding together to develop a mobile-payment system of their own, the Merchant Customer Exchange. An article in The Economist speculated that "Such firms may well use their clout to get the banks to reduce their charges on card transactions."

Consider, too, that MasterCard's global reach means it's vulnerable to global troubles. Recent sanctions against Russia, for example, are likely to work against it. Then there's the courtroom, where MasterCard and Visa have been battling antitrust allegations for years, finally agreeing to a hefty $5.7 billion settlement.

Just because Lone Pine sold off a big chunk of its stake in MasterCard doesn't mean you should. But learning of the sale can be a prompt to re-evaluate the company and your thoughts on its prospects.

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Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns shares of eBay and Verizon Communications. The Motley Fool recommends CVS Caremark, eBay, MasterCard, and Visa. The Motley Fool owns shares of eBay, MasterCard, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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