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Factors Likely to Drive Mastercard's (MA) Long-Term Growth

Zacks Equity Research

Mastercard Inc. MA is well poised to benefit from expanding consumer consumption, secular trend toward electronic payments, its penetration in Business-to-Business vertical, utilization of additional payment platform like the real time automated clearing house (ACH) and a wide international acceptance of its branded cards.

In its most recently held investors meeting, Mastercard  reiterated its intermediate-term (2019-2021) growth objectives of low-teens annual revenue growth, at least 50% operating margin, and high-teens EPS growth CAGR (all in constant currency and excluding the impact of acquisitions). Its 2019 guidance calls for organic constant-currency revenue growth in the low-teens or high end of low double digits, when taken into account nearly 2% of anticipated foreign exchange (FX) headwinds and close to 50 basis points  of merger and acquisition (M&A) benefit.

Mastercard anticipates organic constant-currency expense growth at the high end of high single digit, 300bps incremental M&A related expense growth, and 100bps FX tailwind. The FY19 outlook also expects an effective tax rate approximating 19%.

The company has grown its business over the years by diversifying its product suite, which now offers debit prepaid and commercial solutions. This has also led to an increase in gross domestic value to $5.9 trillion in 2018 from $3.7 trillion in 2012.

Mastercard has also been emphasizing on growing its revenues from Service segment, which consisted 26% of its total revenues. It now provides services such as full suite of cyber solutions, data analytics, loyalty platforms, and processing assets.

The company has also expanded its international business, which has grown from 61% in 2012 to 67% in 2018. Contactless transaction has grown from 1% in 2012 to 22% in 2018.

Recently, Mastercard made investment in financial technology company, Plaid Inc., which will allow it to gain access to new age computerized banking. Plaid writes application program interfaces that act as the infrastructure beneath bank accounts.

Going further, the company sees massive opportunity for growth in the payments market of $235 trillion, which is  served 13% by cards, 87% by cash and checks and ACH and combined.

On the basis of the $5.9 trillion GDV clocked in 2018, Mastercard’s share in payments market is less than 3%.

The company is banking on acquisitions for growth into new payment rails and to this end has announced deals to the tune of $4.2 billion in 2019. MasterCard forayed into ACH with VocaLink acquisition. Other deals of Transfast, Ethoca, Vyze, Transcatis and Nets’ Corporate Services will enhance the company’s capabilities in cross-border payments, bill pay, fraud reduction and chargebacks, electronic payment system for banks, consumers and corporations and help it grow in real time payment domain.

These acquisitions have been made possible by the company’s strong balance sheet with adequate financial flexibility and continuous cash generated from operating activities that has been increasing since 2009 expect in 2014.

Year to date, the stock has gained 46% compared with the industry’s growth of 40%.

Mastercard carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are Diebold Nixdorf, Incorporated DBD, Evertec, Inc. EVTC and INTERNATIONAL MONEY EXPRESS, INC. IMXI. Each of these stocks carries a Zacks Rank #2 (Buy) and have surpassed earnings estimates in the last reported quarter by 140%, 6.82% and 73.33%, respectively.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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