Shares of MasterCard (MA 0.44%) hit an all-time high on Thursday. Let's take a look at how it got there and see if clear skies are still in the forecast.
How it got here
As credit processing facilitators, MasterCard and Visa (V 0.23%) have an incredible amount of unmet demand abroad yet to be tapped. Also, both companies serve strictly as transaction facilitators, keeping them free of the lending nightmare that Discover Financial Services (DFS 0.48%) and American Express (AXP 0.34%) were exposed to as both lenders and processors during the recession.
The real boost that propelled MasterCard shares to a new all-time high was its fourth-quarter results released yesterday. For the quarter, MasterCard notched a 10% increase in net revenue to $1.9 billion as EPS soared to $4.86 from just $0.15 in the year-ago period that was marred by a large one-time cost. Emerging markets continued to offer MasterCard its greatest growth opportunities, with Latin America, Asia, the Middle East, and Africa demonstrating volume of cash growth of 23.5% compared to "just" 9.7% within the United States in 2012.
What could slow MasterCard down?
U.S. regulators, increasing competition among prepaid-debit cards, and a global slowdown are all reasons why MasterCard could run into trouble.
Regulators could choose to enforce tougher regulations on the debit-card industry and have, in fact, capped swipe-fees for processors in the past. Recently enacted credit card legislation, as my Foolish colleague Rich Smith explains, will allow businesses to openly charge credit card users a fee to essentially reimburse themselves for the amount of the charge from MasterCard or any of its peers, and could be another potential pitfall.
Finally, increased competition from Visa, American Express, and Discover, and even greater prepaid-debit competition from NetSpend Holdings (NASDAQ: NTSP) could spell trouble if the global economy goes through an extended and deep contraction.
Can the run continue?
Both MasterCard and Visa are sitting in the driver's seat of a stock car going 200+ mph, but can it continue? I'd certainly say so.
MasterCard has multiple long-term factors working in its favor even if its outlook appeared a bit cautious to some on Wall Street. MasterCard's focus on emerging markets will predominantly shield it from any global slowdowns and give it a nearly limitless pool of potential partnerships and regional opportunities.
MasterCard is also more focused and better financed than many of its peers. Nothing against NetSpend -- which has quietly amassed an impressive list of customers including eBay's PayPal, and 7-Eleven -- but MasterCard can produce the amount of free cash that NetSpend has on its balance sheet ($26.4 million) in just four days! With American Express and Discover focused on lending as much as processing, MasterCard and Visa are free to rule the roost when it comes to transaction facilitation.
At about 20 times forward earnings, MasterCard is nearly as inexpensive as in years past. However, given the fact that it can grow its gross dollar volumes being transacted in emerging markets by 15% or greater for what I project will be at least the next decade, I'd call it remarkably undervalued here. I will continue to leave me CAPScall of outperform firmly in place on MasterCard.