Mastercard's (MA -0.07%) long streak of outperforming the S&P 500 came to an end last year. Shares of the mega-cap payments processor rose just 0.7% in 2021, which significantly lagged the S&P 500's 26.9% gain. The good news for Mastercard's shareholders is that the stock looks set to return to its winning ways in 2022. The stock is up a bit year to date, which is better than the 5% decline in the S&P 500.
Here's what growth investors need to know about Mastercard for this year.
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The company actually benefits from inflation
With the inflation rate reaching a near 40-year high of 7% in December, it's really an understatement to say that inflation is on the minds of economists, investors, and consumers. Investors need to be mindful when constructing their portfolios to make sure that they can endure all economic environments, including high inflationary periods.
Fortunately, Mastercard is built to do especially well when inflation ramps up because of both its business model and fortress-like balance sheet. Mastercard earns revenue based on the dollar volume of transactions and number of transactions that the company's payment network completes for financial institutions that issue cards.
Despite rather lofty inflation, U.S. consumers remained undeterred in their spending based on the most recent month of data, in November 2021. To this point, U.S. consumer spending rose 0.6% from the year-ago period. Thus, manageable inflation and the resulting increase in the costs of goods and services will be more of a benefit than detriment to the company's revenue and profitability in the future. This helps to explain why analysts are forecasting a 20% jump in Mastercard's revenue this year to $22.5 billion. And this higher revenue base should propel the company's non-GAAP (adjusted) earnings per share (EPS) to $10.51, a 27% gain.
On the balance sheet side of the equation, Mastercard also won't be negatively affected by the series of interest rate increases the Federal Reserve is planning this year to tame inflation. That's because Mastercard's net debt is only $6.9 billion ($13.9 billion in long-term debt minus $6.9 billion in cash and investments). Mastercard has the means to quickly pay off any of its variable-rate debt should interest rates quickly soar. This is because the company produced $10.8 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) in the last 12 months.
Potential COVID-19 headwinds remain but are more manageable
While COVID-19 still had an effect on the economic recovery in 2021, this wasn't enough to stop the global economy from growing an estimated 5.5% in 2020, according to the World Bank. Even with COVID-19-related interruptions to economic activity still expected in 2022, vaccines and antiviral pills from the likes of Pfizer (PFE -0.19%) should help to limit the effect of the omicron variant during the year. Therefore, the World Bank anticipates that global economic growth will only slow a bit, to 4.1%, in 2022.
This should also act as a catalyst to drive Mastercard's revenue and earnings higher in 2022.
Buy Mastercard before it's too late
Mastercard appears to be positioned to deliver another year of excellent revenue and earnings growth. Combined with the reasonable valuation for a stock of its quality, this could lead to a great 2022. What makes me believe Mastercard is attractively priced for growth investors?
Well, the stock is trading at a forecasted 2022 EPS multiple of 35. While this may sound high, analysts are predicting that the stock's earnings growth will accelerate from 22% annually in the past five years to 26% annually over the next five years. Taking Mastercard's long-term tailwinds and the robust balance sheet into account, this is arguably a fair valuation for the stock. That also demonstrates why Mastercard's current $361 share price could offer investors a gain of 19% based on the average analyst target of $430 for this year.
Throw in the savings account-beating 0.5% dividend yield on the shares, and Mastercard is a stock that growth investors won't want to miss out on in 2022.
