- MasterCard is benefiting from low interest rates.
- The company enjoys solid financial growth.
- MasterCard earnings growth is forecasted to slow as per the company's latest announcement.
Interest rates have been at record lows for years. Which companies benefit the most from this? Credit card companies like MasterCard (NYSE:MA) and Visa (NYSE:V) among others. Credit card companies have a nice racket, I mean, business model. They obtain money at low interest rates and lend at exorbitant interest rates. You may not think of buying something with your credit card as a loan, but if you don't pay it off in full every month, then a loan is exactly what it is.
Money compounds fast at rates above 20% annually. When a lot of people are willing to pay excessive rates of interest, that makes for a highly profitable company. When the company can also charge you a multitude of fees, including late fees, over-the-limit fees, etc., then the profit potential is even higher.
MasterCard has solid financials. In the past two years, revenue has climbed 12-15% annually while earnings per share have climbed at a rate of over 20% annually. Mastercard's profit margin during the past twelve months was 39%, operating margin was 53%, and return on equity of 58%. While the P/E ratio is high for the trailing twelve months at 28, investors are willing to pay a premium for the steady growth of the company. With $1.5 billion in debt in the most recent quarter, the company pays low interest that it lends out at over 20%.
MasterCard stock fell sharply last month, like most stocks, but has since recovered about half of those losses. The stock reached a 52-week high of $98.18 on August 10. It fell to an intra-day low below $75 before closing the day at $87.83. For the past two weeks of trading the stock has been bouncing in a range of $90-94.
In spite of these strong results, MasterCard announced last week that earnings growth would slow in 2016-2018 to the "mid-teens", compared to over 20% in the past 2-3 years. The projected slower growth rate in MasterCard earnings appears to be giving pause to investors, who are holding the stock in a sideways range for the present time. The company's CFO mentioned higher tax rates as part of the reason for the slowdown. MasterCard also mentioned they will be using some of their profits to buy back stock. While this is a good use of company funds, it does lower profits in the short-term.
Like all U.S. companies that do business internationally, the strong dollar is slowing the company's sales in foreign markets. However, short-term currency fluctuations will not prevent MasterCard's continued growth in foreign markets. The company has also mentioned it is seeking to gain a larger share of the fast-growing market in China.
While investors will need to keep an eye on growth rates to see if they more slowing in the short-term, the long-term prospects for Mastercard continue to look bright.
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