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Mastercard’s Q4 2019 Report Supports Its Premium Valuation

By Nicholas Rossolillo - Jan 30, 2020 at 7:52AM

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Initial 2020 guidance coming out of the earnings report for the financial giant looked pretty good as well.

Digital payment processing giant Mastercard (MA 4.34%) just finished out 2019 on a strong note. Fourth-quarter business results accelerated once again, leading to yet another big jump in the bottom line. Mastercard stock has been a dead ringer for investors in the last decade, and with the 2020s now upon us, this leader in the war on cash still has lots of good stuff going for it.

A rundown on 2019

Even though Mastercard is a massive operation that hauls in billions in revenue every quarter from its toll booth-like operation (it charges a small fee every time a transaction is processed on its system), the growth story is far from over. Physical money is still by far the preferred method of transacting business around the globe, leaving Mastercard and its fellow war-on-cash peers plenty of room to keep expanding. 

In fact, though it is quite large, Mastercard's momentum has been picking up speed as of late after a sleepy start to 2019 -- helped by adoption of digital payments in emerging markets and a string of technology acquisitions the last few years, geared especially toward the company's add-on services like data analytics and digital payment security. 

Period

Revenue

Change

Full-year 2018

$15.0 billion

20%

Q1 2019

$3.89 billion

9%

Q2 2019

$4.11 billion

12%

Q3 2019

$4.47 billion

15%

Q4 2019

$4.41 billion

16%

Data source: Mastercard.

The 16% top-line gain in Q4 was accompanied by another advance in operating profit margins, which were up to 54.4% on an adjusted basis (which backs out one-time non-recurring items) compared with 52.3% a year ago. The gross dollar volume of transactions processed in the period grew 12% to $1.7 trillion, and other revenues -- primarily cybersecurity and data services -- grew 24%. Added into results from the rest of the year, 2019 was a pretty good run for Mastercard.  

Metric

Full-Year 2019

Full-Year 2018

Change

Revenue

$16.9 billion

$15.0 billion

13%

Adjusted operating profit margin

57.2%

56.2%

1.0 pp

Adjusted earnings per share

$7.77

$6.49

20%

Pp = percentage point. Data source: Mastercard.

In other news, currency exchange rates once again didn't work in Mastercard's favor and took a small toll on the report card. In total, fluctuations in currency values reduced revenue and adjusted earnings by 3% each. Helping offset the headwind, though, was another massive return of capital to owners of the stock: $6.5 billion in share repurchases (2% of the current market cap of $326 billion) and $1.3 billion in dividends (which equates to a current annual yield of 0.5%).  

Someone pictured off screen inputting credit card info into a laptop.

Image source: Getty Images.

Don't sweat the premium

Mastercard shares have run up a more than 1,200% return in the last decade -- including nearly 200% in the last three years alone. The stock price has simply been following profitability higher in that stretch of time, and that will likely continue even though Mastercard trades for premium pricing, currently at 41.7 times the last year's worth of adjusted earnings.

I say so because of the company's steadily rising top line (aided by the company's ability to make high-growth acquisitions) and its huge profit margins. The added bonus, of course, is share repurchases, which lower share count and boost earnings per share. It's a powerful combination that should continue to equate to double-digit bottom-line growth for a long time. Management expects revenues to expand at another low teens percentage rate in 2020 -- excluding the effect of any acquisitions made -- so another corresponding profit increase is certainly in the cards. Based on 2020 projections, the stock trades for 30.2 times earnings, still premium pricing, but well deserved. After the Q4 update, Mastercard remains one of my favorite stocks.

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