Mastercard Inc (MA): Can a Near $600 Stock Be Cheap?

When I see a stock trading for nearly $600 a share, I have the same reaction many investors probably have. It’s frustrating that the company chooses to keep the share price so high, as smaller investors like myself would have trouble accumulating a decent number of shares. While I know intellectually this higher price is the same value as 10 shares worth $60 each, there something gratifying about owning 10 shares as opposed to one. That being said, Mastercard Inc (NYSE:MA) trades for nearly $600 a share, but even at this price, you could make the argument that the stock is cheap.

Organic Growth and What This Means for the Company’s Earnings
It should be no secret that more and more transactions are being processed electronically, and Mastercard Inc (NYSE:MA) along with other processors like Visa Inc (NYSE:V), Discover Financial Services (NYSE:DFS), and American Express Company (NYSE:AXP), all stand to benefit from this continued trend.

The difference between these four companies seems to be that Mastercard Inc (NYSE:MA) and Visa Inc (NYSE:V) are better positioned to capitalize on the increase in electronic transactions than their competitors. These companies have much wider acceptance than either American Express Company (NYSE:AXP) or Discover Financial Services (NYSE:DFS). In addition, they generally charge lower interchange fees to merchants, which makes it cheaper for stores to accept Visa or MasterCard. That being said, MasterCard seems to be capitalizing on its opportunities slightly better than Visa at the present time.

Two ways that Mastercard Inc (NYSE:MA) is outperforming Visa Inc (NYSE:V) is by reporting better transaction and dollar volume growth. For an apples-to-apples comparison, we have to use last quarter’s results since Visa has already reported earnings whereas MasterCard has not.

When it comes to processed transactions, MasterCard reported a 12% increase last quarter, compared to a 6% increase at Visa, a 1% increase at Discover Financial Services (NYSE:DFS), and a 7% increase at American Express Company (NYSE:AXP). Looking at dollar volume growth, this trend held again with MasterCard reporting a 12% increase, compared to 9% at Visa, 2% at Discover, and about 7% at American Express. Though analysts have similar expectations of growth from Visa and Mastercard Inc (NYSE:MA), the diversions in their organic growth profiles suggest analysts may have the numbers wrong.

Slightly Better
When comparing MasterCard to Visa, I found myself thinking several times that MasterCard was performing slightly better in a couple key areas. First, I would make the argument that MasterCard’s valuation is slightly better than Visa’s at the present time.

Both companies pay yields that are less than 1%, with MasterCard at about 0.40% and Visa at roughly 0.69%. In addition, analysts expect significant earnings growth from both companies with Mastercard Inc (NYSE:MA) expected to report 17.7% growth in Visa expected to report 18.7% growth. The difference is, MasterCard sells for a P/E ratio that is about 2 lower than Visa’s, which makes the overall comparison tilt slightly towards MasterCard. Given these choices, I would be hard-pressed to recommend either American Express at 11.8% growth or Discover at 7.6% growth, even with their slightly more than 1% yields.