MasterCard (MA) – BfGf Portfolio

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Sometimes, the best stock ideas are all around you, and in the case, it’s already in your wallet!

 

Mastercard (MA) was added to the Bf Gf portfolio on 21 Nov 2014 at a price of $84.50.  A month earlier (Oct 2014) it’s price had dropped to as low as $70 but that totally escaped my radar…  I was probably busy with work and missed my opportunity.  (Dammit!)  Nevertheless, I regard MA as a powerhouse, buying it at a PE of about 29 at that time, is considered fair for me.  Also, being such a dominant company in the cashless payment industry, I have allocated a mid-size bet as I do not see much risks that could derail MA from is course.

 

As I am writing this, MasterCard is at $91.25, representing a paper gain of about 8%.  Not as exciting as GoPrO but there is so much to love about this steady, plodding giant.

 

MasterCard (MA) is in the business of cashless transactions.  Many people mistake them for a credit card company but they are not; they provide the infrastructure or system to enable the transactions between the consumer and the retailer.  MA then takes a bite out of that transaction as revenue.  Whether the consumer pays his credit card bills at the end of the month or not, that is the problem of the credit card company, not MA’s problem.

 

To even start off explaining why I love MA so much, let me throw out a question:

 

In the future, do you think the world will be using more cash payment or cashless payment?

 

If you say cash payment  –  I fear you may be living under a rock your whole life…. or maybe you are some hippie/zen guru/apocalpyse-cult worshipper.

 

If you say cashless payment – Then your next question should be:

 

Why MasterCard?

 

This question will throw up a big debate and there are many ways to approach it.  But for now, I am sure everyone can agree that cashless payment is the future.  In fact, Warren Buffett sees this as well when he bought American Express in the 80s.  Cashless payment has and always will be the future!  And for my style of investing, I want to be part of strong, dominant companies that can benefit from industry tailwinds or big macro-trends.  By the way, there is still a large room for growth as industry experts state that 85% of the world still uses cash for transaction.

 

In a market survey done by Nilson Report in 2014, Visa and MA dominate purchase transactions worldwide with Visa owning 60.5% and MA owning 27% of the market share.  These 2 companies dominate, on total 87% of the market, while all the other companies like American Express, JCB, China Union Pay, scramble for scraps.  Do take note that these survey was conducted in 2013.  I have yet to find newer data for this.  Anyways, this data is pretty good to help me single out both Visa and MasterCard as the top picks for the industry.  I prefer dominant, proven companies which own a larger market share as I feel that there are many advantages skewed towards them.  For more about my thoughts of market/industry dominance, read this old article I wrote.

 

Although Visa is much bigger than MA, I prefer MA simply because of its management.

 

V key ratios

Visa’s key ratios (above) : Take note of Return on Invested Capital of 12.42 – 20%, year 2010 onwards

 

MA key ratios

 

MA key ratios (above) – Take note of Return on Invested Capital of 43-48%, year 2010 onwards.

 

By comparing the Return on Assets, Return of Equity and the Return on Invested Capital between these 2 companies, you can see that MA edges out.  A quick check on Glassdoor also shows that MA employees give their company and CEO higher scores compared to the employees of Visa.

 

MasterCard Reviews   Glassdoor Visa Inc. Reviews   Glassdoor

A lot of MasterCard’s current success has to do with CEO Ajay Banga.  Ever since taking the helm in 2010, he proceeded to steer MA away from its conservative culture into a more open one.  He also placed a focus on being innovative to remain competitive in this industry.  You can get a deeper insight of this man here.

Furthermore, MA’s market cap is 104B, while Visa is at 161B.  I would prefer investing in a smaller company as it is easier to grow revenues.

 

Other notes:

MA has also been actively buying back their shares.  MA has been buying back their shares last year, and even more aggressively this year. During the first 3 months of 2015, MA has already spent $950M buying back 11M shares. There is still $2.8B set aside for more share buybacks.

 

 

Competition risks 

With the cashless payment industry set to be the way of the future, many competitors are entering the fray or are trying to fight for the pie.  As a MA shareholder, I do not think that it is so easy to chip away at this big boy.  Visa and MasterCard’s economic moat and reach are already so wide, the newbies have to work hard to play catch-up.   ApplePay, PayPal, JCB, Unionpay and several other small start-ups count as competitors that may pose as a threat to MA. However, payments is still a huge industry and there may be a lot more pie to go around.

 

Other Thoughts on Investing in the Payments industry

When I presented this stock, many people brought up points like

– Visa is more dominant.

– I own significantly more Visa cards than MasterCard

– There are so many start-ups trying to disrupt the payments industry

 

Again to address this points, I would like to point back to effective management and leadership.  Although many people like to argue that a company is made up of many employees and cannot depend on only one leader, I would like to argue that the leader has the biggest influence on the company’s overall strategy and probably has more effect on the big decisions of the company compared to a normal/worker or staff.  Besides a good leader, attracts talent.  Nobody likes to work for a crappy boss.  As for the point about disruptive start-ups trying to enter the fray, I would like to point out that Ajay Banga is steering MA to have an innovative culture.  In an interview, he mentioned that he has a team and budget set aside to come up with 2-3 actionable ideas every 2 years.  Their CEO understands the need to remain innovative to stay ahead of the competition.  I would be really worried if MA, or any other company in the Bf Gf portfolio decides to rest on their laurels.  Hungry disrupters exists in every industry.

 

Of course, there are many ways to invest in the payments industry.  Some people suggested investing in both Visa and MasterCard to be more conservative and there’s nothing wrong in that.  For me, I would like to use the cash to invest in a smaller company…

 

Hmm…speaking of which, I am interested to see PayPal’s spinoff from Ebay in June later this year…

 

 

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9 Comments

  1. LP

    Hi,

    I read that you bought a lot of US stocks in your portfolio. Do you hedge against USD? If not, are you not afraid that the forex will erode your gains? What about dividends? Wouldn’t the tax erode a huge % off the declared dividends? How do you mitigate all these?

    Reply
    1. The Bf (Post author)

      Hi LP,

      No I don’t hedge against the USD… I don’t know how to. I am not afraid of forex eroding my gains as my timeframe is up to 10 years. I am also hoping that currency exchange doesn’t go through permanent, drastic changes that will cause permanent damage to my portfolio. That being said, I fall back on the US companies that I hold to continue to do well and overcome these currency setbacks.

      As for dividends, I have Sg stocks to help supplement that. My US stocks don’t really pay much dividends, and like you said, the tax on dividends is pretty hefty. US stocks for growth, Sg stocks for dividends – that’s how I am calibrating my portfolio. For now, I have a stronger emphasis on growth which I will explain why in another long post.

      To Lp or anyone reading this, do feel free to let me know your thoughts on hedging against currency risks. I am totally clueless about this and would like to learn more!

      Reply
      1. LP

        These are very real issues and must be addressed. The reasons why i said this is because I used to invest heavily in us shares in the past too. That was the time when the exchange rate was nearer to 1.7 compared to the current 1.3 now. You can imagine the kind of losses I would have sustained just from forex losses alone. Who knows what might happen in 10 yrs? If you’re not certain that you can even make a profit, after accounting for forex, it’s not a wise investment.

        I’ve not done hedging before. But I suggest before u put further money into your portfolio, you should go learn about it and execute it. The worst thing that can happen after 10 yrs of waiting is that theoretically, the stock did exceedingly well but the forex erases all the gains. So much effort for naught…

        Reply
        1. The Bf (Post author)

          Ouch. That’s a painful experience. Thanks for sharing it LP! Will definitely read up more about currency risks.

          Reply
        2. The Bf (Post author)

          Hi LP, after consultation with gurus, I got some answers – sharing with other noob investors like me as well.

          Guru consensus

          – Companies that have business operations overseas have already hedged against currency risks. (E.g MA revenue only grew 3% after accounting for the stronger US dollar… My gains however is actually 14% after accounting for the rise in the USD. Hope that made sense.)
          – Hold gold to hedge (I still need further convincing hahaha!)
          – Holding stellar companies are still the best hedge ( eg,Walmart in the 70s till now the gain outstrip currency depreciation.)

          Thank you Gurus for your replies.

          Reply
          1. LP

            Hmm, let me illustrate with an example. Let’s say u bought acme company at $100 usd. The forex is 1.7 usd to 1 Sgd. So u paid $170 Sgd. After it reaches $130 usd, u sold it. At that point in time the forex is $1.3, so you got back $169 Sgd.

            The % gain in price of the company is 30% but the % gain in Sgd is 0.59%.

            This has nothing to do with the hedging that a company does (well, not directly anyway). So you not only have to worry about the fundamentals of the company, the price of the company and now you also have to worry about the forex rate. You have to hit 3 to win.

            Not easy.

  2. LP

    Typo in my forex rates…but u know what I mean 😉

    Reply
    1. The Bf (Post author)

      Yup I totally get your example. Again, I am banking on the company gains to outstrip currency depreciation with a long term holding period.

      With the advantage of hindsight, let’s say in 2005, USD was $1.70. Then if you had picked companies with strong earning power like Priceline, Apple, MA, etc, your multi-baggers will be more than enough to offset currency exchange loss.

      Or let’s say those examples are too extreme, if we pick Berkshire Hathaway brainlessly in 2005, we our gains will be reduced by currency loss from 144% gain to 121%.

      Or if businesses like GPRO, due to depreciating USD, causes more people overseas to buy more of it – because it is now cheaper, might rake in higher revenues, and the stock price will increase to match the fundamentals?

      At the end of the day, the general consensus is earnings power matter more over currency fluctuation.

      Of course, if I can find an SGX stock that can scale/innovate/grow like MA, I will be more than happy!

      Reply
  3. LP

    Alright, I hope for your sake that you’re right on 3 counts – that the fundamentals are strong enough, the price will follow the fundamentals of the counter, the currency risk against you is lower than the increase in share price.

    Reply

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