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Hey Traders,
The US might be heading into recession.
While this will have ramifications all over, the one area of business that will see it coming first and bear some of the brunt is payment processors – the credit card companies.
This is why I am taking a deep dive into one of the biggies in payment processing: Mastercard Inc (Ticker: MA).
Mastercard is the second biggest credit card company after Visa Inc (Ticker: V). It’s worth about $355 billion to Visa’s $460 billion.
The two are pretty much synonymous – although Visa does have the Costco card, which is where that name differentiates itself. Outside of that, a look at one is essentially a look at the other.
I usually like to go with the big dog in an industry, but not this time … I’ll explain why in a bit.
The Good
Mastercard makes money – and a lot of it. The company had a net income of $9.66 billion in the last twelve months. On revenue of $22.82 billion, those are great margins.
It pays a nice dividend of 2.04 per share.
Like I said, it makes a lot of money.
If we hit a recession, this company will STILL make money – it will just make less.
Mastercard is pretty much ingrained in payments across the board: online and in person.
They partner with just about every bank in the United States and, in fact, most of the world. If you have a Mastercard, you can pretty much use it everywhere.
If there are going to be credit card defaults, it’s really not Mastercard’s problem because the banking partner is the one taking on the debt.
The pain they will take will be in the overall reduction in transaction size and frequency.
Speaking of …
The Bad
Like many of the major companies out there, the PE has gotten really extended. I’m not sure why a payment processor would have a PE of 37, but Mastercard has a PE of 37.
I just don’t get why a company like Mastercard would be valued so high relative to its earnings. Visa has a PE of 30, and American Express has a PE of 17.75.
I’m not sure what amazing thing MA is doing to deserve the valuation – it’s basically the same company as Visa.
The other issue is a recession. If it happens, the average cost of a transaction is likely to fall, and people will buy less.
This is bad.
The Verdict
This is the last credit card company I would want to put money into of the big three … except for this:
Mastercard’s total open interest is about 166k contracts … on Wednesday, a trader bought 20k calls.
Flow trumps fundamentals. MA might be in for a move higher.
Questions about that? Leave a comment below!
Your Only Option,
Mark Sebastian