MASTERCARD

The market saw a major change today. The eight dollar pull back in the price of oil looks to have at least set its price to trade between the $100 and $110 mark. This is only speculation as a new trading pattern has not established itself. If we were to listen to many of the energy experts, as with T. Boone Pickens, the $100 bottom is almost here. With that said, it should stimulate some growth in the US stock market as the dollar should strengthen somewhat and although there is a global slowdown, generally speaking US stocks should see upside going forward. It is even much more bearish for oil since this happened during hurricane season.
One of the best stocks in the stock universe is MA. I like the stock here as it has seen a sell off since its highs of $320 a share. MA has been trading for only approximately two years and has seen unbelievable growth. If we look at the basic reasons for growth with in the company, we see that there has been growth in all the key areas. Net revenue and income, gross dollar volume, and most importantly the number of processed transactions. Naysayers will tell you that slowing global growth will adversely affect this stock, but it is still above overall trends, and technology will add to growth in the long term. Since they make their money off of processed transactions, they are not affected by the credit default environment. They also receive growth from an ever increasing middle class. As the world's middle class gets larger they have even more customers, plus people are using less cash and checks, which leads to more credit card transactions. More customers are paying via the internet and this is another space for growth.
One of the biggest reasons I like MA, is that they as with Visa, are so firmly entrenched in their industry. They have a unified global structure, technology based processing platform and strong relationships. This has allowed them to become a world player and be the first to many locations. Over 50% of their revenues are from outside the US. To understand the actual size of the growth in this area, we must first disect the possibility for growth. If we are to use the United State's as an example we would first look at what the statistics are. The GDP per capita is $46000, inflation is 3%, unemployment is 5.2%, with a population of 303 million and an average age of 36.7 years (these are approximates as per the CIA World Fact Book and US Census Bureau and may be somewhat out of date). Looking at Asia Pacific Middle East and Africa there are large areas of growth. Of this group, the areas of high income are Japan, Korea, Taiwan, Hong Kong, Singapore and Australia. When clumped together they have a GDP per capita of $29800, inflation at 1.8%, unemployment 3.6%, population of 232 million, and median age of 38.6 years. The upside to this group of countries is the high income, giving the population plenty of money to spend, and growth through changing the customers into cards as opposed to checking accounts and cash. They also have a much better economy with low unemployment and inflation. Their population together is a little over two-thirds that of the United States and MasterCard is growing usage. With in this division, the Philippines, Thailand, Malaysia, and Indonesia the GDP per capita is $3560, inflation is 3.4%, unemployment is 5.2%, the population is 406 million, and median age is 27.2 years. These countries also have a reasonable inflationary rate, especially when you consider the growth in these regions. The clumped populations are larger than that of the US by over a 100 million. Also they have a very young age of population, which would make them much more excepting of change with regards to how they spend their money. The biggest story is within the emerging economies. These countries comprise of China and India. They have an average GDP per capita of $1800. Inflation is 5.8%. Unemployment is at 5.9%. Their combined population is 2.445 billion. Average age is 29.1. These statistics are mind boggling. With a population eight times that of the United States, the increase in card users could be large. Even though they make less money, MasterCard charges per transaction so the amounts are not as critical. Unemployment is only seven tenths higher than the US and that is with their much larger population.
MasterCard also has growth from their technologies. Europe is a good example of how they are expanding. Currently, Europe has 18 different national debit schemes. What this means is that each country has done their own credit/debit style systems. This has created a lack of continuity as each system only works with their individual cards. If a tourist from another country goes to Europe, they are unable to use their card. Also, if a European travels from country to country, some countries have only one provider and this lack of competition has limited expansion of cardholders as it is easier to carry cash. MasterCard has implemented a system that has allowed for growth in this region. SEPA allows a cardholder to travel from country to country with access to debit funds. Will increase competition and thus provide for expansion of cardholders. It will lower costs for customers, and lower barriers to have cards. SEPA is already 3% of cross border transactions in Europe. It also is 97% of domestic transactions currently that did not have competition before SEPA was implemented. They are looking to expand even more in Europe by co-branding with other domestic banks. 13 countries, including 100 banks, that have 70 million cards are currently changing to the SEPA system, which will add to the current 150 million card holders that have already switched.
With respect to growth in the US, debit transactions have grown 27% on average, per year since 2002. Now 90% of US households have a debit card linking them to funds at their bank. Each of these debit cards averages 17 transactions per month. If we look at the time frame between 2006-2011, debit purchase volume is estimated to increase 74.7%. PIN usage has increased as point of sale purchases using this have increased 53% in 2007. Last year there was an increase in debit purchase volume by 24%. ATM transactions increased 19% in 2007. From 2005 to 2007, annual growth rate was 36% for debit purchase volume. Over this same period transaction volume had a compound annual growth rate of 38%.
For those that believe that MasterCard's growth with slow, there are plenty of reasons to remain bullish. In 2006, global consumer payments totaled 2.9 trillion. Of this, cash was 2.662 trillion. Checks accounted for 79 billion. Electronic cards and EFT were 148 billion. Of cards and EFT, the US accounted for 57% and the rest of the world 43%. By 2010, estimates have electronic payments increasing to 279 billion with the rest of the world's share at 68%. This has the CAGR for the US increasing 9%, and 22% for the rest of the world. This equates to a global CAGR of 17%. Worldwide, 2003 had a gross dollar volume at 1.248 trillion in local currency. In 2007, that number increased to 2.277 trillion. Gross transactions have also increased dramatically over the same time period. In 2003, transactions globally were 15 billion and in 2007 than number was 27 billion. Looking at MA's projections, they see annual net revenue growth of 12%-15%, annual operating margin to increase by 3%-5%, and annual net income growth of 20%-30%.
MA's growth remains intact and is still a good stock going forward. Remember, this is not a credit story but a technology evolution that MA is spear heading. Look for MA to continue moving up.