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MA - Mastercard


Liberty

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A company with a strong moat, nice margins, strong growth potential, and apparently a big advantage over Visa in China.

 

I've only just started digging, so I don't have an IV estimate yet, and I could find things I dislike, but so far it certainly looks like a company that deserves its own thread here.

 

For those also looking, there's a year-old writeup on the VIC that might be a good starting point.

 

Feel free to share your MA insights here :)

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The latest Sequoia investor day has some good thoughts regarding them.  I will admit I'm biased, I purchased right after the IPO and have held tight so yeah, I like the company and what it's done for my wallet.

 

If I remember correctly they were targeting 20% growth YoY, I know that slipped during the recession but based on some comments I've seen I think that's their target again.

 

Back when I was looking into them Citi had some great research, it was a 40-50pg note detailing in excruciating detail how the three party payment system worked.  It was a long read but well worth it, if you have access to sell-side stuff you should be able to get it.  The note is from 2006 but the system hasn't changed since then in any material way.

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The latest Sequoia investor day has some good thoughts regarding them.  I will admit I'm biased, I purchased right after the IPO and have held tight so yeah, I like the company and what it's done for my wallet.

 

Congrats, it's been a nice run. Out of curiosity, what made you choose MA over V? Looks like they're following each other pretty closely, so I suppose it doesn't make that much of a difference (at least so far), but I wonder if they'll start to diverge more as their fortunes are more and more dependent on emerging markets..

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This analysis is a bit older, but could be useful:

 

http://m100.marketocracy.com/rmcduff_RMG1/2010/05/mastercard_nyse_ma_22309_price.html

 

Interesting that almost none of Visa is held by insiders while about 10% of MA is (according to Yahoo finance, anyways).

 

Does anyone have color on MA's management? Have they shown to be talented, ethical, energetic?

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  • 3 weeks later...

Liberty

 

Just realized I never answered your question, anyways I didn't have to choose, MA went public about a year before Visa and I bought shortly after the IPO.

 

I do like MA better, you get the entire company including European operations whereas Visa is ex-Europe.  For the past few years I envied the Visa position of having a larger percentage in debit transactions but after the Dodd-Frank this has turned into a big negative.  I don't remember the exact breakdowns but MA has something around 20% debit vs 80% credit.

 

As for the management I haven't really been wowed, I view MA as the type of company a monkey can run, they are entrenched and as long as nothing is screwed up the cash machine keeps printing.  So far that's been true, the BOD is a pet peeve of mine.  If you look at the bio of each director they're involved in 5-10 other companies each, I don't know how they could have enough time to fully understand any company.  I know the CEO is newer, he was the head of a division and did well in that regard so he was promoted up.

 

 

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Thanks! This one is definitely in the top tier of my watchlist, but I'm still struggling at valuing it and knowing what's cheap enough to buy and what isn't.. Do you have a rule of thumb for what kind of P/E or FCF yield would be considered attractive for MA considering its growth and moat?

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I believe management has been targeting 20% YoY growth for the past few years.  During 08/09 growth slowed and the price dropped like a rock.  I think they're back in the low 20s and expect this to remain going forward.

 

I know for myself I try to target a 10% hurdle rate being ROE/(P/B).  That's my hurdle for a decent business trading at a cheap multiple.  I've violated that rule for net-net's or asset/turnarounds.  Right now for MA I have the what I call investor return (number I mentioned above) calculated at 5.86%.  To get to 10% MA would need to trade at a P/B of 4 or a price of $156, doubtful we'll see that.

 

Of course in that calculation there is no adjustment for the intangible of MA's network, or the brand. 

 

I understand your problem, I've looked at Visa on and off for the past few years and struggle with what a cheap value is, even in light of holding MA.  I think the best approach is to back into the market growth rate based on a few different discount rate scenarios and then judge accordingly. 

 

Oh, I just looked, Morningstar estimates a 13% revenue growth rate with a 8% terminal rate and a sustainable 46% operating margin.  So this is one data point.

 

Best of luck!

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  • 3 years later...

In the "the one that got away" category...

 

I've started thinking about V and MA again lately, and went over my 2011 notes and some recent filings and transcripts... Wish I had pulled the trigger back when I first started this thread.

 

Hopefully there will be another nice entry opportunity at some point. I doubt it'll ever be super-cheap, though. Hard to find a better business of this scale. Not surprising that Todd Combs (I assume it's him) has been buying both members of the duopoly.

 

This old piece on two-sided markets is interesting:

 

http://www.gurufocus.com/news/155261/twosided-markets-and-mastercards-moat-ma

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In the "the one that got away" category...

 

I've started thinking about V and MA again lately, and went over my 2011 notes and some recent filings and transcripts... Wish I had pulled the trigger back when I first started this thread.

 

Hopefully there will be another nice entry opportunity at some point. I doubt it'll ever be super-cheap, though. Hard to find a better business of this scale. Not surprising that Todd Combs (I assume it's him) has been buying both members of the duopoly.

 

This old piece on two-sided markets is interesting:

 

http://www.gurufocus.com/news/155261/twosided-markets-and-mastercards-moat-ma

 

That article is from one of our fellow board members, FYI.

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In the "the one that got away" category...

 

I've started thinking about V and MA again lately, and went over my 2011 notes and some recent filings and transcripts... Wish I had pulled the trigger back when I first started this thread.

 

Hopefully there will be another nice entry opportunity at some point. I doubt it'll ever be super-cheap, though. Hard to find a better business of this scale. Not surprising that Todd Combs (I assume it's him) has been buying both members of the duopoly.

 

This old piece on two-sided markets is interesting:

 

http://www.gurufocus.com/news/155261/twosided-markets-and-mastercards-moat-ma

 

That article is from one of our fellow board members, FYI.

 

Really? May he raise his hand, please?

 

I was just thinking yesterday that it's too bad this author doesn't write anymore, and I actually tried to search for another blog or twitter account using his name (maybe he goes under un alias?) and was disappointed to not find anything. Had I known he was here, I would have asked directly :)

 

I'm certainly curious to know if he still holds MA (V?), and what his updated thoughts are.

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Liberty,

 

Raising my hand. Here is the original write up from 2010 when I purchased MA.

http://www.investorsantholgy.com/2010/12/30/mastercard-the-prize-of-owning-the-priceless-brand/

 

I recently presented to a small group of folks  (at Google, my workplace) interested in value investing on why Wall Street mispriced MasterCard.

https://docs.google.com/presentation/d/1fROziaKAcmM0NYM6zc3LApiTVBBBmLTJ_w9sBiAVrSU/edit#slide=id.g1259289b7_05

 

MA/V are a 10% position for me today. This is the only compounder type business I hold in my portfolio, the rest of the portfolio are reasonable businesses at cheap valuation. Happy to answer any questions, although I doubt there is anything I can say that you don't already know.

 

- Rishi

 

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Liberty,

 

Raising my hand. Here is the original write up from 2010 when I purchased MA.

http://www.investorsantholgy.com/2010/12/30/mastercard-the-prize-of-owning-the-priceless-brand/

 

I recently presented to a small group of folks  (at Google, my workplace) interested in value investing on why Wall Street mispriced MasterCard.

https://docs.google.com/presentation/d/1fROziaKAcmM0NYM6zc3LApiTVBBBmLTJ_w9sBiAVrSU/edit#slide=id.g1259289b7_05

 

MA/V are a 10% position for me today. This is the only compounder type business I hold in my portfolio, the rest of the portfolio are reasonable businesses at cheap valuation. Happy to answer any questions, although I doubt there is anything I can say that you don't already know.

 

- Rishi

 

That is impressive, Rishi. Curious your thoughts on the equity of your employer?

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That is impressive, Rishi. Curious your thoughts on the equity of your employer?

 

I love working at Google. I work on Google's compute infrastructure. More on it here:

http://www.wired.com/2013/03/google-borg-twitter-mesos/

 

Unfortunately, I can't comment on Google as an investment. I am considered an insider.

 

Hi Rishi,

Is there a way to subscribe by email to your blog? http://investorsanthology.com/

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That is impressive, Rishi. Curious your thoughts on the equity of your employer?

 

I love working at Google. I work on Google's compute infrastructure. More on it here:

http://www.wired.com/2013/03/google-borg-twitter-mesos/

 

Unfortunately, I can't comment on Google as an investment. I am considered an insider.

 

Hi Rishi,

Is there a way to subscribe by email to your blog? http://investorsanthology.com/

 

Right now, it's pretty bare bones. I am migrating it to a new platform. Check back in a few weeks.

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Liberty,

 

Raising my hand. Here is the original write up from 2010 when I purchased MA.

http://www.investorsantholgy.com/2010/12/30/mastercard-the-prize-of-owning-the-priceless-brand/

 

I recently presented to a small group of folks  (at Google, my workplace) interested in value investing on why Wall Street mispriced MasterCard.

https://docs.google.com/presentation/d/1fROziaKAcmM0NYM6zc3LApiTVBBBmLTJ_w9sBiAVrSU/edit#slide=id.g1259289b7_05

 

MA/V are a 10% position for me today. This is the only compounder type business I hold in my portfolio, the rest of the portfolio are reasonable businesses at cheap valuation. Happy to answer any questions, although I doubt there is anything I can say that you don't already know.

 

- Rishi

 

Hi Rishi,

 

Glad to find you so close to home ;)

 

And happy to see that you are still writing. Your recent piece on See's Candies was quite good and highlights just how good these asset-light, high-ROIC, differentiated/moated businesses can be if you can find them at fair (or better!) prices. It's an interesting exercise to look at the multiples you could have paid for some of these 10-20-30 years ago and still have beaten the market (caveat: I know, survivorship bias, etc. Not all cigar butt investments work out either).

 

Which brings me to MA (and V, since they're almost the same thing). I'd be curious to know about how you think about fair value (is it a specific FCF multiple?), at what FCF multiple would you be buying more and at what multiple would you be selling?

 

Or is it more of a "I'm hanging on to this one until the story changes, any non-crazy overpricing will be corrected over time, I'd rather ride these out than sell and risk missing out on years of good growth, and non-crazy underpricing will be good for buybacks, so let's do nothing unless in crazy territory". Not to put words in your mouth, but that's how I think about some things :)

 

IMO the biggest challenge with these very high quality businesses is what value to assign to the quality. With a business that is ok-good, it might be fairly easy to say "ok, growth is about X, normalized earning power is about Y, at a conservative multiple it's worth Z, and right now it's selling at 0.6x Z so I can buy and wait for it to revert to about Z". But with high quality 'compounders', I feel like the margin of safety is in the attributes that will protect the business and keep it growing value at superior rates over long periods; if your analysis of these is correct, paying what seems a high price for an ordinary business can actually be a bargain, and if you're wrong, well... It's the same as being wrong on the true IV/earning power of an ok-good business. Your margin of safety could turn out to have been an illusion all along...

 

All this to say that I'm curious to learn more about how you value that quality and how much extra you are willing to pay for it in the case of MA (and V).

 

Looking forward to your next blog posts. Cheers!

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Liberty,

 

Raising my hand. Here is the original write up from 2010 when I purchased MA.

http://www.investorsantholgy.com/2010/12/30/mastercard-the-prize-of-owning-the-priceless-brand/

 

I recently presented to a small group of folks  (at Google, my workplace) interested in value investing on why Wall Street mispriced MasterCard.

https://docs.google.com/presentation/d/1fROziaKAcmM0NYM6zc3LApiTVBBBmLTJ_w9sBiAVrSU/edit#slide=id.g1259289b7_05

 

MA/V are a 10% position for me today. This is the only compounder type business I hold in my portfolio, the rest of the portfolio are reasonable businesses at cheap valuation. Happy to answer any questions, although I doubt there is anything I can say that you don't already know.

 

- Rishi

 

Hi Rishi,

 

Glad to find you so close to home ;)

 

And happy to see that you are still writing. Your recent piece on See's Candies was quite good and highlights just how good these asset-light, high-ROIC, differentiated/moated businesses can be if you can find them at fair (or better!) prices. It's an interesting exercise to look at the multiples you could have paid for some of these 10-20-30 years ago and still have beaten the market (caveat: I know, survivorship bias, etc. Not all cigar butt investments work out either).

 

Which brings me to MA (and V, since they're almost the same thing). I'd be curious to know about how you think about fair value (is it a specific FCF multiple?), at what FCF multiple would you be buying more and at what multiple would you be selling?

 

Or is it more of a "I'm hanging on to this one until the story changes, any non-crazy overpricing will be corrected over time, I'd rather ride these out than sell and risk missing out on years of good growth, and non-crazy underpricing will be good for buybacks, so let's do nothing unless in crazy territory". Not to put words in your mouth, but that's how I think about some things :)

 

IMO the biggest challenge with these very high quality businesses is what value to assign to the quality. With a business that is ok-good, it might be fairly easy to say "ok, growth is about X, normalized earning power is about Y, at a conservative multiple it's worth Z, and right now it's selling at 0.6x Z so I can buy and wait for it to revert to about Z". But with high quality 'compounders', I feel like the margin of safety is in the attributes that will protect the business and keep it growing value at superior rates over long periods; if your analysis of these is correct, paying what seems a high price for an ordinary business can actually be a bargain, and if you're wrong, well... It's the same as being wrong on the true IV/earning power of an ok-good business. Your margin of safety could turn out to have been an illusion all along...

 

All this to say that I'm curious to learn more about how you value that quality and how much extra you are willing to pay for it in the case of MA (and V).

 

Looking forward to your next blog posts. Cheers!

 

I think with compounders you have to answer really tough questions - you have to think about competitive advantages, industry landscape, growth prospects. I don't consider myself smart enough to look too far into the future and be able to predict these kinds of business questions. To be able to make higher than market returns on these compounder type businesses one has to make these predictions and be right about it, especially when you pay a high P/E. Warren Buffett is very smart, yet he has less than a dozen stocks in total (that are not fully owned) over a decade. As per Morningstar's universe, there are 266 wide moat stocks. Their definition of wide moat is one where the competitive advantages last for more than 20 years. I think they are being overly zealous in my opinion.

 

Having said that, here is what I think about MA/V

- Long runway of growth: 85% of transaction globally are still cash.

- Network effects: Their network is very different (and much more powerful) from the Western union network. Western Union likes to say that we have the most locations in the world. But adding a new location to the network does not really add value to the existing locations. Here is why: There are lots of people sending money from the San Jose to cities in Mexico and there are lots of people sending money from San Jose to various cities in India. There is a large Mexican and Indian population in San Jose. But, there aren't that many people in Mexico sending money to India or vice versa. So a competitor can take out the San Jose to Mexico channel without having to disrupt the India channel. So arguably the Western Union network is a bit weaker in the sense that some legs can be taken out. In the MA/V case, you cannot do that. You carry a MA/V branded Chase debit/credit card because you know that if you go to Figi Islands, your MA/V branded card will be accepted by a mom-and-pop sandwich shop even if they don't know what Chase is.

- High P/E: What is the fair value of a business that is inflation protected (revenue goes up as global GDP goes up and transactions in nominal currency goes up)? It is like an inflation protected bond yielding 5%. i.e. 20x eps. MA/V is trading at a slight premium to this - 25x. I would say this is fair value but not overvalued.

 

Risk:

- Technological Disruption: I have written about this in my article about two-sided market. Apple seems to have gone in the direction of partnering with MA/V rather than bypassing them. There are emerging mobile person to person networks (in Africa) that have really taken off. So, there is some risk to this. But disrupting the global cross border transactions is very difficult.

- Legislation Risk: The risk here is real. Since the IPO, big box retailers along with the help of governments have gone after the networks. People put more weight on the technological risk, but this risk is much larger and more real.

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Great stuff. ^

 

Risk:

[...]

- Legislation Risk: The risk here is real. Since the IPO, big box retailers along with the help of governments have gone after the networks. People put more weight on the technological risk, but this risk is much larger and more real.

 

We've already seen legislation or threats to legislate caps to interchange fees, but wouldn't you say the majority of this risk is borne by the banks?

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  • 8 months later...

Hi,

being a fan of the payments industry.

Here is a small follow up concerning Mastercard.

Revenus are not growing as quickly as Visa in the second quarter (7% for Mastercard versus 14% for Visa). Some explanation could be found in the fact that they are more aggressive as far as incentives are concerned. This is understandable as they are the challenger compared to Visa.

 

Compared to Visa, their structure is simpler (the European business is already part of Mastercard which is not the case for Visa).

 

Concerning valuation, we have a P/FCF of 27. For the FCF, I took 4,1 billion USD which more or less represents  a slight increase compared to the 2013 number. Maybe I am little too conservative. 2014 was impacted by an increase in the prepaid expenses. This number should come back to the level of the previous years (600 MUSD).

 

Cheers!

Jeremy

No hodlings in Visa and Mastercard.

 

 

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  • 5 months later...
Guest notorious546

this might be a silly question.

 

Seems like management has decided to buy even more shares as they have performed well over the past few years. It would be interesting to see if they got more aggressively now that shares have corrected a little bit.

 

congrats to everyone who has held the stock until now.

 

from what i can see consensus numbers place the shares at a low 20x earnings multiple and mid 20x cash flow multiple. any color on how this has looked compared to historical levels? I'm getting more interested at today's levels.

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