One share of MasterCard (NYSE: MA ) : $215 at current prices. Transaction cost to purchase one share of MasterCard: $7 on Scottrade. A business model immune to consumer credit risk? Priceless.
Network effect
The company's credit card network derives revenue every time one of its cardholders whips out his or her card to buy something. Unlike credit card issuers, such as Capital One (NYSE: COF ) , Inside Value recommendation Discover Financial (NYSE: DFS ) , American Express (NYSE: AXP ) , or Citigroup (NYSE: C ) , it doesn't matter whether the cardholders can actually pay the bills they're racking up; MasterCard will take its transaction fee regardless. Nor does it matter as much that tapped-out U.S. consumers are slowing their spending.
MasterCard defied the consumer-spending slowdown and credit turmoil in its latest quarter, riding a rising tide of consumers who are increasingly pulling out plastic instead of currency or checks to make a purchase. That means mo' money for credit card networks -- but not mo' problems.
In the company's fourth quarter, net revenue grew 27.8% to $1.07 billion, while gross dollar volume increased 15.2% to $634 billion. MasterCard ended the year with 916 million cards issued, up 12.6% from a year ago. As a credit card network with mostly fixed costs, a huge portion of MasterCard's incremental revenue falls straight to the bottom line. Operating income for the quarter increased to $172 million, from $46 million a year ago, and operating margin improved a whopping 10.3 percentage points.
What recession?
Looking forward, management expressed optimism that growth would continue, despite a tough U.S. economy. Of the company's $634 billion in fourth-quarter gross dollar volume, only $268 billion came from the United States. In addition, MasterCard's business model is driven more by transactions than volume, and according to management, the previous recession of 2001 saw the former metric grow more quickly than the latter.
In all, MasterCard posted an impressive quarter. The company's business model provides considerable protection against credit risk and consumer fatigue, leading investors to highly prize its earnings streams. However, at a nosebleed price of around 30 times estimated 2008 earnings, I'd wait for shares to get much cheaper before taking the plunge.
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