MasterCard Reports Steady Growth
Wide-moat Mastercard’s (MA) full-year 2016 results were broadly in line with our expectations, and we are maintaining our $120 per share fair value estimate. The firm was not completely immune from the competitive pressures facing the industry--rebate and incentive costs grew by 20% from the fourth quarter of 2015 as the company priced new deals and renewals more aggressively. We don’t think it’s surprising that the firm’s customers are demanding better terms. Regulations have reduced the profitability of the card-issuing business for banks. Additionally, the increasing bargaining power of merchants is reducing the size of the total payment value chain. Nevertheless, we feel Mastercard is well positioned in spite of these trends. Its status as part of a duopoly should contribute to rational competition over the long term. Its fees represent only a small portion of the total payment value chain. Finally, its network of global banks, merchants, and cardholders is extremely difficult to replicate.
We think Mastercard’s ability to increase revenue and profitability over the long run is a function of these advantages and a steadily growing market for digital payments. Reported fourth-quarter net revenue grew by 9% over the past 12 months (10% excluding currency movements). Annual diluted EPS also grew by 10%, and Mastercard’s ancillary revenue streams are performing well. Other revenue grew by 21% from the fourth quarter of 2015, benefiting from increased customer interest in data analytics, rewards, and loyalty programs.
Management has addressed the potential impacts of recent political changes in the United States, and we agree that Mastercard would be a major beneficiary of a lower tax rate. Unlike firms in highly competitive industries, Mastercard would likely be able to pass on a sizable portion of tax savings to shareholders as a result of its strong competitive advantages.
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