Finally, and possibly most importantly, onerous regulation is an ever-present risk facing MasterCard. U.S. legislators have made it clear that they’re willing to step in and actually cap MasterCard’s and other credit card companies’ debit fees when they feel that it’s in the best interest of merchants and consumers — as demonstrated by The Dodd-Frank Act — and it’s possible that regulators in other countries will take similar action in the future. In addition to the threat of increased regulation is the threat of litigation, as MasterCard is facing multiple lawsuits with the potential for billion-dollar settlements. Unfavorable rulings could have serious negative effects on MasterCard’s stock price, but the fear associated with these non-certain outcomes is also a likely reason we can buy MasterCard’s shares at such an attractive price today.
Valuation
Within Tier 1, I’m willing to pay a bit of a premium for a quality business — and MasterCard certainly fits the bill. But with the company trading at 19 times analysts’ earnings estimates for 2014, and with Wall Street expecting nearly 18% annualized growth over the next five years, I don’t think we’re paying that much of a premium for MasterCard. In fact, I estimate that shares could return more than 12% per year over the next half-decade if Banga and his team can reach those growth targets, and I believe they will. Those would be solid returns for a Tier 1 business that I consider to be moderate- to low-risk.
The Foolish bottom line
MasterCard is a dominant Tier 1 business with many years of strong growth ahead. It will benefit from the long-term secular trend of cash to plastic as well as the growth of the global economy — two trends in which I’m eager to invest. And so, at least 24 hours after this article is published — standard operating procedure for The Motley Fool’s Real-Money Stock Picks program that’s designed to give Fools the opportunity to buy ahead of us should they so choose — I will be buying shares of MasterCard in the Tier 1 Portfolio.
The article MasterCard Is Tier 1 originally appeared on Fool.com and is written by Joe Tenebruso.
Joe Tenebruso manages a Real-Money Portfolio for The Motley Fool and is an analyst on the Fool’s Stock Advisor and Supernova premium service teams. You can connect with him on Twitter: @Tier1Investor. Joe has no position in any stocks mentioned.The Motley Fool recommends Amazon.com, Apple, eBay, Google, and MasterCard and owns shares of Amazon.com, Apple, Citigroup, eBay, Google, and MasterCard.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
