Why Mastercard Expects Earnings To Double Over The Next Four Years

Mastercard (MA -0.08%) enjoys some of the strongest operating margins of any publicly traded company, and it's also putting up strong growth numbers.

In this episode of "Beat and Raise" recorded on Jan. 28, Fool.com contributors Jason Hall and Brian Withers discuss Mastercard's latest quarter and why the company is poised for a strong 2022.

Brian Withers: We have Mastercard and then following right up, we're going to bring Trevor on to do Visa right on the same day. It's nice.

Jason Hall: I mean it feels like almost like the same report. There's some differences in the business. I want to say this real quickly I think it's important. Their core businesses today are largely the same, their rails are the rails that digital transactions run on for the most part. They don't lend money out. All of the banks that want to lend credit cards, they want to have a Mastercard or Visa or both. Because those are the cards that are accepted everywhere. Some merchants want them because all of the banks issue them. Consumers want them because also the merchants take them. So you have this three-pronged stool and this network effect that's really, really strong for both of these companies and we talked earlier because we're actually talking about the stock twice today. I think it's really insulated from a lot of the fintech stuff because a lot of those platforms end up running on the Mastercard or Visa network. Anyway, so it's just because it's so secure and it's known at its trusted and buddy it's back. I think in a lot of ways, it's a little bit of a proxy for like, how is the economy broadly doing?

The results here, I mean, it's hard to argue about a business that's at this scale. They reported 27 percent revenue growth. I want to point out too, this is unlike it's coming off of a bad fourth-quarter a year, a year ago. The revenue that Mastercard reported in the fourth quarter of 2020 was better than the revenue that it was in the fourth-quarter of 2019, the last full pre-COVID quarter. Business is really good, it is really surging. Earnings per share came in at $2.41 a share that was up 35 percent. It also beat on the adjusted earnings, the one that analysts look at, which was $2.35 per share. Just a solid overall quarter, we get into some of the numbers. We start peeling back the layers and it just continues to look good. Gross dollar volume, $2.1 trillion with a T. That's all the dollar values that flowed on Mastercard's rails. Not just their portion of it, but all the dollars that went. That was up 23 percent.

I took a closer look in their release. There wasn't like one area that just propped it up. It wasn't like US sales were up 35 percent and that supported everything else. Every market that they publish, every market was better than it was in 2020 and in 2019. All of the regions, all of their different products. Credit cards, debit cards, prepaid, and those different buckets in the different regions that they breakout were up across-the-board. Real positive stuff there. Purchase volume was up 27 percent. Purchase volume is when somebody swipes a card at a merchant or you go and you enter your credit card number online and you actually buy something. It excludes those. The checks that you get in the mail from. Those are not included in that number. Actual purchase volume was up 26 percent growth in transactions. You see the purchase volume was up higher than transactions, we've talked about inflation, but the reason it wasn't a massive increase is because we've seen a lot more in-person purchases, which tend to be casual spending and a little bit smaller ticket amounts. That's why those numbers kind of wash out a little bit there.

I want to talk about the cross-border volume because this is a really important number for Mastercard and Visa. Over the past year, year-and-a-half, this has been like the biggest weak spot because this is like travel-related expenditures. Needless to say, that was terrible for most of last year. But in the fourth quarter, we saw cross-border volumes excluding the Euro-zone where you have a lot of cross-border transactions that happen just because the economies are so tied together. Excluding that, it was in December that we finally saw that number creep back over 100 percent. I think it was like 98 or 99 percent at the end of the month, it was back over 100. Then through January the updated data that they've reported with this release, they said it was well over 100 percent I think is like 100, 103 percent. Even that, the one weak spot for most of the past year has largely, recovered. Mastercard does it when they issue their press release, they don't issue just the next year guidance. They give a multi-year guidance. They're predicting that revenue is going to grow at a high teens rate, at a compounded annual growth rate over the next few years and earnings-per-share is going to grow because of that. Amazing. Just the margin, the operating margin, the operating leverage of this business. Earnings-per-share growth is going to be in the low 20s, compounded annually over the next few years. Lots to like.

Brian Withers: Absolutely, Jason, you kind of mentioned that Mastercard is accepted everywhere. I know in the past I've had an American Express and I've had a Discover card, and I gave up on both of them for the same reason is, you go to your favorite store or restaurant, and then they say, well we don't accept that card. Then you got to have other cards in your wallet. I think we're Visa customers. I got the Amazon Prime card, Chase card there. But it's really helpful that Mastercard is just ubiquitous.

Jason Hall: It is one thing they're focusing on it. Just want to mention this as a good like keep following this. They're really focused a lot on that. Cross, like the business-to-business and merchant and person-to-person payments. Because as much as the retail transactions is big, there's a 4x market-the market is four times larger for payments that they're really focused on, and they've been a faster mover there than Visa has. It's really going to drive a tremendous amount of growth for the business over the next 5-10 years. I'm really excited about that.