Top 64%
I'd like to start some discussion on Mastercard (MA). The shares have been beaten up since the spring of this year. I believe that the weakness is a result of the combination of the perception 1) that consumers will spend less, and therefore use their cards less and that the credit issues will undermine people's access to credit, also weakening MA's business model, and legal concerns in the EU and with AXP. I think there are also those who are shorting the stock in anticipation of liquidation of some hedge funds. But, if you look at the actual operating results of the company over the past year, you get good news. For example, revenue for the 2nd quarter 2008 was $1,246,504,000 compared with $996,959,000 for the same quarter in 2007. Operating income was $268,816,000 in the second quarter of 2007, compared to $416,141,000 if you exclude the settlement paid to AXP. The stock, has appreciated ~69% from this time last year (I used Aug 3rd 2007 when the price was about $131). But, since May/June of this year when it was > $300, it has lost pretty significant ground. So, the strong appreciation since last summer (and even through the middle of spring this year) seems to indicate that the market believes that MA can weather the more general economic and consumer spending problems. Now that we are post settlement with AXP we shouldn't expect further pain and the EU has basically decided what it wants to do with its fee legislation, removing lots of the uncertainty and presumably decreasing hand wringing among us investors.. So, why the downturn in the last couple of months? And what do you think about MA's business over the next couple of years?
[Data from MA's Form 10-Q for the three months ending June 30th 2008, page 4 and Google Finance].
Top 1%
dirtyharry
Sep 06 at 2:23 ET
It's certainly better than V, but I wouldn't buy it just yet. Even with the mortgage bailout, there are still many, many home loans left to unwind (option ARMs). This can continue to bleed the consumer. Perhaps in the short term they use their credit cards, but at some point, they get tapped out. Once they are tapped out: No more transactions on that card.
The better numbers you're seeing may be consumers needing to use their credit cards because they are being tapped out elsewhere (home equity lines). Much like people running to buy supplies before a hurricane hits - the surge in purchases do not represent sustainable new demand but rather a temporary condition before the storm arrives. Afterwards, demand falls off sharply because now a lot of people have too many supplies that they really didn't need. In this case, consumers will just max out until they can charge no more.
I would take a wait and see approach to MA.
Top 4%
alex108
Sep 06 at 4:49 ET
Harry, I'd agree. I think the next wave of defaults etc will be on consumer credit cards. There have been numerous stories of people tapping credit cards for mortgages and other staples they didn't normally put on cards due to credit lines drying up. With unemployment going up I'm guessing its only a matter of time before the profit of Visa and MasterCard are impacted, perhaps bigtime.
Great franchise for both but I'd wait before moving in, I think the bottom is still some time off.
Top 1%
guliamo
Sep 07 at 3:28 ET
I agree. If the point is buying companies on the cheap, I would feel safer with companies from other sectors. Companies as sound as MasterCard have dropped 60% for lesser reasons..
On the upside, I think MA and V will have a tough time gaining value once the cloud of doubt is cleared.. Investor money, currently on the side lines, will go other places first.
I personaly like Home Healthcare for a 3-4 year play, AFAM and AMED being my favorites.
Top 64%
longterminv
Sep 07 at 7:19 ET
This is a good point: the wave of revenue could be because people are retreating to their credit cards. Still, people have to buy stuff: food and gas at a minimum. They need to buy with something, so even if the consumer weakens, a secular shift to cards may still help MA in the long term. Are people using more cash to buy the stuff? Checks? Debit cards? Debit is OK because MA processes those, too.
As far as the running to credit cards point Hary makes, have any of you actually done that or do you know anyone who has? I'm trying to find out whether this is a perception or it is in fact actually happening. I'll say that in my case, I use my credit card for absolutely everything, $1 to $10,000. I get free debt for up to 60 days depending when in the cycle you actually buy something and all kinds of reward points which, used effectively, can offset expenses in other areas. It is a much more efficient way to buy than either cash or check. In fact, I can't think of a better way to buy unless you take advantage of long term 0% offers and actually read the fine print and pay before you get nailed.
Top 1%
guliamo
Sep 07 at 7:30 ET
Not arguing your rational, just taking the decesion to a higher scope - why invest in credit cards in the first place?
You're right that people will continue to use plastic, but why put your hard earned dollars into that mess.. I feel there is uncertainty in the financial sectors and it's better to stay away, especially when there are so many ways MA and V can get affected..
Top 4%
alex108
Sep 07 at 8:05 ET
Rational is sound, but with what is going on in the fiancial sector, if perceptions shifts that there is trouble in credit cards (and I think there really will be) these two could drop like a rock no matter what the real value is. Remember, especially in this market "perception is reality". I would stay well away from these and anything else in the financials for quite some time, even short is dangerous- note the futures for tomorrow due to the "bailout" of Freddie and Fannie- major pop which I don't think will hold. I'm thinking of buying some short ETF's after this pop!