💳Business Overview

🎯Key Metrics

Total: 12.5/17

• +2 ✅✅ Projected Operating Margin: 60.50%
• +1 ✅ Projected 5-Year Revenue CAGR: 11.28%
• +2 ✅✅ Last 5-Year ROIC: 44.00%
• +1 ✅ Estimated Cost of Capital: 6.11% (lower than ROIC)
• +1 ✅ Last 5-Year Shares Outstanding CAGR: -2.24%
• +1 ✅ Projected 5-Year EPS CAGR: 14.94%
• +1 ✅ Projected 5-Year Dividend CAGR: 11.55%
• +1.5 ✅ Moody’s Debt Rating: Aa3
• +2 ✅✅ Morningstar Moat: Wide
• +0 ⚠️ Morningstar Uncertainty: Medium

📈Mastercard has a wide moat displayed on its stellar operating margin. It also shows solid revenue and EPS growth along with a return on its capital 7-8 times more than its estimated cost of capital.

Let’s value the business and check if the current price is justified.

📝Business Valuation

To calculate the intrinsic value of the company I’ll use multiple methods:

• Discounted Cash Flows (DCF) – Intrinsic value is estimated by projecting its free cash flows over the next 10 years and discounting them to present value using the estimated cost of capital;
• EPS Growth – the fair value is estimated by projected the Earnings Per Share CAGR for the next 5 Years and then, given its current and historic values of PE, come up with a PE for the 5th Year. This will give us its price 5 Years from now using the formula: Price = EPS x PE that we then discount using the estimated cost of capital;
• Historical P/E – we assume mean reversion to the historical P/E values;
• Historical P/CF – we assume mean reversion to the historical P/CF values;
• Historical P/S – we assume mean reversion to the historical P/S values;
• Historical EV/EBITDA – we assume mean reversion to the historical EV/EBITDA values.

Cost of Capital

I’ve used the latest annual financial statement of the company, the 10-Year US bonds as the risk free rate and revenue geographic exposure to come up with its cost of capital, cost of debt and cost of equity. Also, given the fact that Moody’s provided a rating for the company I used it as the debt rating.

Cost of Capital: 6.11%.

This value will be used later as a discount rate in the valuation methods.

Please feel free to come up with your own values by using the tool I’ve used: Cost of Capital – The Fair Value Journal. It is and will ever be completely free 🙂

Discounted Cash Flows (Weight: 40%)

I’ve used the latest annual financial statement of the company, the analyst estimates for both revenue and margins and the cost of capital calculated previously.

Some notes on the inputs above:

• Terminal Revenue Growth – I’m using the risk-free rate (10-Yr bonds of the US), because long term the company should not grow more than the rate of the economy. I’m using the risk-free rate as a proxy to it, so the terminal growth becomes it;
• Terminal Cost of Capital – I’m assuming its Cost of Capital begins at its current estimated value and then gradually converges to the industry average;
• Initial and Terminal Tax Rate – I’m assuming here for both the industry average, given that its historical averages are around it.

All the other inputs were taken from the financial statement or from analyst projections.

The DCF gives us an estimated fair value of 652.07 dollars for Mastercard, higher than its current price.

Something that we can also do now is to play around with Monte Carlo simulations. What this will allow us to do is to simulate multiple DCF valuations with pre-defined ranges for each of the inputs. Each simulation will randomize the inputs between these pre-defined values. For this I also used analysts estimates.

As you can see from the above Mastercard seems to be undervalued given that its current price of 536 dollars is around P20. From these simulations we can extrapolate that there’s ~80% probability of Mastercard being undervalued and ~20% probability of Mastercard being overvalued.

Please be free, as before, to fill in your own values. Make the valuation your own and do yourself a DCF valuation using your own assumptions: DCF – The Fair Value Journal

EPS Growth (Weight: 30%)

For this valuation method, I’ve used the current EPS and the analysts estimates of EPS growth. I also assumed a 25 PE for the company.

Then again used the Monte Carlo simulations to check what happens when the input values change within a specified range:

Using this valuation method, Mastercard that is currently priced at 536 dollars seems to be undervaled being currently priced close to P10. From this we can extrapolate that there’s ~90% probability of the stock being undervalued and ~10% probability of the stock being overvalued.

This seems to be in line with what we’ve seen during the DCF valuation.

As before, feel free to try this yourself: EPS Growth – The Fair Value Journal

Historical P/E (Weight: 10%)

The current P/E (Price / Earnings) ratio is a little below its 10 Year average. This means that the company is a little undervalued or fairly valued by this metric. Assuming a mean reversion to its historical average of 37.93 we can assume a fair value of 612.73 dollars.

For every type of historical and relative valuation you can use the same free tool: Historical / Relative Valuation – The Fair Value Journal

Historical P/CF (Weight: 10%)

The current P/CF (Price / Cash Flow) ratio is below its 10 Year average. This means that the company is a little undervalued or undervalued by this metric. Assuming a mean reversion to its historical average of 34.49 we can assume a fair value of 637.17 dollars.

Historical P/S (Weight: 5%)

The current P/S (Price / Sales) ratio is around its 10 Year average. This means that the company is fairly valued or a little undervalued by this metric. Assuming a mean reversion to its historical average of 15.88 we can assume a fair value of 577.85 dollars.

Historical EV/EBITDA (Weight: 5%)

The current EV/EBITDA ratio is below its 10 Year average. This means that the company is undervalued or a little undervalued by this metric. Assuming a mean reversion to its historical average of 25.67 we can assume a fair value of 611.53 dollars.

✍️Summary

Now that we did all the heavy work, let’s take the above and come up with the company weighted average fair value.

I basically take each valuation method used and given my confidence on the company apply a 20% or 10% discount (when to buy) and addition (when to sell) or use the Monte Carlo P10, P20, P80 and P90 values:

Feel free to choose your own values, given your confidence in the company, but for me I’ll probably would start buying at around 545.23 dollars given my confidence that Mastercard will maintain its wide moat, even if reducing a little bit its margins.

Overall it seems Mastercard is undervalued or at most a little undervalued at the current prices.

Fair Value: 595.52 dollars