money Mastercard Stock Shows Every Sign Of Being Modestly Overvalued
- By GF Value
The stock of Mastercard (NYSE:MA, 30-year Financials) is believed to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $363.78 per share and the market cap of $360.5 billion, Mastercard stock is believed to be modestly overvalued. GF Value for Mastercard is shown in the chart below.
Because Mastercard is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 9.3% over the past three years and is estimated to grow 11.84% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Mastercard has a cash-to-debt ratio of 0.56, which ranks in the middle range of the companies in Credit Services industry. Based on this, GuruFocus ranks Mastercard's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Mastercard over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Mastercard has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $15.4 billion and earnings of $6.53 a share. Its operating margin is 53.10%, which ranks better than 80% of the companies in Credit Services industry. Overall, the profitability of Mastercard is ranked 10 out of 10, which indicates strong profitability. This is the revenue and net income of Mastercard over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Mastercard is 9.3%, which ranks in the middle range of the companies in Credit Services industry. The 3-year average EBITDA growth is 9.3%, which ranks in the middle range of the companies in Credit Services industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Mastercard's ROIC was 38.99, while its WACC came in at 8.89. The historical ROIC vs WACC comparison of Mastercard is shown below:
In short, Mastercard (NYSE:MA, 30-year Financials) stock is believed to be modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Credit Services industry. To learn more about Mastercard stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
