Morgan Stanley (MS 0.10%) analyst James Faucette has a price target on Mastercard (MA -0.07%) -- one of the top dogs in the payments industry -- of $441. This implies almost a 50% upside from today's prices, and a 55% rise from the stock's 52-week low.
These price targets set by analysts are only projecting the next 12 months, much shorter than a long-term investor's time horizon. However, it does show that Wall Street is optimistic about the company. Let's find out why Faucette might be so excited about Mastercard's future.
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A weak economy isn't hurting operational results
In 2022 alone Mastercard is down nearly 19%, despite the business's continued success. Most investors fear that because the U.S. is seemingly on the verge of a recession and inflation is high, Mastercard will see less payment volume as consumers spend less money. However, that wasn't the case in the company's second quarter. While consumers might be changing what they are buying, Mastercard didn't see much change in how much consumers are spending.
Investors can see this in the company's healthy Q2 financial report. Gross dollar volume worldwide reached $2.1 trillion for Mastercard during Q2, which represented a 14% jump from the year-ago period, showing that consumers aren't slowing their spending. This helped Q2 revenue jump 27% on a currency-neutral basis to $5.5 billion.
This combination of growth and a stock price drop has resulted in an appealing valuation for Mastercard. Right now, the company trades at about 30 times earnings, nearly its lowest valuation in five years. There's been only one other time over that period Mastercard fell this low: The COVID crash of 2020.
The money keeps coming in
This sustained activity for Mastercard helped the company see jaw-dropping profitability. During the first two quarters, net income surpassed $4.9 billion as operating cash flow reached $4.2 billion.
With the cash it's generated, Mastercard has rewarded shareholders very nicely. Mastercard has reduced its number of shares outstanding by almost 10% over the past five years, although its dividend yield is just 0.66%.
There's reason to believe its buybacks and dividend yield could rise over time. The dividend Mastercard currently pays represents only 19% of earnings, so the company could (in theory) pay a much higher dividend by using more of its profits. This could come to fruition as the company matures and reinvests less into the business. Additionally, the company could significantly ramp up its buyback program. Year-to-date, Mastercard has repurchased $4.8 billion of stock. However, the company has over $6.7 billion left in its buyback authorization, leaving plenty of room to accelerate its repurchase program.
All of this means more benefits for existing shareholders. Not only are the current actions attractive, but patient investors should expect even more shareholder-friendly actions in the coming years.
Why Mastercard looks strong for the long haul
Mastercard is a dominant force in the payments industry, with control of 23% of total credit card purchase volume in 2020. That market share is behind only Visa (V 0.33%). However, Mastercard and Visa combined control almost all the rails of the payments processing industry, making it difficult (and expensive) to upend Mastercard's position.
Additionally, maintaining security levels and scalability would be extremely difficult for an emerging rival. Even if legislation enabled increased competition, it would be tough for smaller players to provide the same security and widespread offering that Mastercard and Visa do.
With disruption a remote risk, Mastercard is likely to continue expanding. That would help the company maintain its steady cash flows, which it can distribute to shareholders over the long haul.
Faucette is correct: The next 12 months could look incredibly bright for Mastercard. As do the next five years. The company's leadership is unlikely to end, so investors can feel safe owning this stock for the long haul. At its current valuation, Mastercard looks like an outstanding opportunity to buy now and never sell.
