mastercard

MasterCard Investors Sweat the MarginsHello, Fool! | Login | Signup | My FoolAll Motley Fool ServicesChampion FundsGlobal GainsHidden GemsIncome InvestorInside ValueMillion Dollar PortfolioPay DirtRule BreakersRule Your RetirementStock AdvisorStocks 2008*Get a Fool Credit CardApr 27, 2008 12:04 AM ET | Site Changes | HelpHomeAll HeadlinesFool VideoFoolanthropyAbout The Motley FoolInvestingBasicsBrokersETFsOptionsSmall-CapDividends & IncomeHigh GrowthValueMutual FundsInternationalPersonal FinanceSaving & SpendingCredit & DebtHome & Real EstateDeath & TaxesIRAsMint Personal FinanceRetirement5 Must KnowsInvest ItPreserve Nest EggPlan EstateAvoid PitfallsDiscussion BoardsBest OfFavorites & RepliesCustomizeStart a New BoardCAPS/QuotesCAPS HomeMy CAPSStocksScreenerPlayersTop TensTagsContestsContact UsMentorsHelpPremium ServicesStock AdvisorHidden GemsInside ValueRule BreakersIncome InvestorChampion FundsGlobal GainsAll ServicesChampion FundsGlobal GainsHidden GemsIncome InvestorInside ValueMillion Dollar PortfolioPay DirtRule BreakersRule Your RetirementStock AdvisorStocks 2008Fool's Two Top StocksChoose a BrokerChoose a BrokerToday's HeadlinesProducts & ServicesCAPSChampion FundsDiscussion BoardsFool Credit CardGlobal GainsHidden GemsIncome InvestorInside ValueMillion Dollar PortfolioPay DirtRule BreakersRule Your RetirementStock AdvisorStocks 2008More...InvestingBondsBroker ComparisonETFsIndex FundsMutual FundsStock IdeasMore...Personal FinanceSaving & SpendingCredit & DebtHome & Real EstateIRAsDeath & TaxesMore...Site ChangesRSS Headlines SiteMap/More TopicsEmail SubscriptionsMedia Center Work at The FoolEmailPrintContact UsDiggDeliciousRSSThe Most FoolishRecommendedReadEmailedRecentMost RecommendedArticles published in the last 7 daysWarren Buffett Is a Better Investor Than YouWe've Got Your Back, BernankeI Died Too Soon3 Reasons the Economy Is Headed South3 Ways to Yield Wealth From DividendsEverybody Loathes NetflixApple Slices, Amazon Reprises, Starbucks SurprisesStocks Headed in the Right DirectionSelect Comfort: No More Sheep to Count?The Simple Strategy That Crushes the MarketMost Searched Value Investing ArticlesRelated TickersMAAXPCCRTCOFHBCSKSWMTMasterCard, Inc.MA$237.39-2.16(-0.90%)[4:04 PM]CAPS Rating:1941 Outperforms223 UnderperformsRate This StockRelated Articles about MABusiness events scheduled for the coming week[4/25/2008 6:06:00 PM]Some financial stocks thrive amid credit crisis[4/25/2008 4:03:00 PM]Before the Call: Leave Home Without MasterCard[4/25/2008 2:05:00 PM]MA RSS FeedMajor IndicesS&P 5001,397.84+0.65%DJIA12,891.86+0.33%RSL 2K721.88+0.67%NASD2,422.93 -0.25%Updated: 4:02:51 PMSponsored by:The Motley PollHow do you prepare your taxes?Paper and pencil, just like in the dark ages.I fill out the forms myself online.I'm a loyal tax software buyer.I just dump everything on my accountant.Didn't they take enough tax out of my paycheck already?!Sponsored by:Sponsored byValue Investing MasterCard Investors Sweat the MarginsBy Emil LeeFebruary 12, 200725RecommendationsIn the classic film The Graduate, recent college graduate Ben (played by a young Dustin Hoffman) is famously given one word of career advice for the future: "Plastics." Well, we all know how Ben's story ends, but perhaps he would have done better if he'd considered going into another kind of plastic -- credit cards.Shares of credit card network providers and issuers such as MasterCard (NYSE: MA), Capital One (NYSE: COF), CompuCredit (Nasdaq: CCRT), and American Express (NYSE: AXP) have all handily trounced the S&P 500 over almost any given time period. It's not hard to figure out why. To be successful in the credit card industry, you have to be big -- a credit card's pretty useless if you can't use it anywhere. Thus, network effects keep out most upstarts.Economies of scale are also huge; credit card companies attract customers via marketing and advertising, and these customer acquisition costs become minuscule when spread over a large base. As well, there are learning experience barriers involved with trial-and-error marketing data. And lastly, the returns on incremental capital are through the roof. When a credit card company signs up a customer, the infrastructure is already there and incremental costs are very low -- so a fat chunk of the sales the company collects when the new cardholder starts spending fall right to the bottom line. When you combine a huge moat with rich incremental margins, you get fireworks, and MasterCard's stock has skyrocketed roughly 130% since its IPO.Of course, this is easy to say in hindsight. Your humble author missed MasterCard's stratospheric rise because he wanted to shave a few more bucks off his cost basis as a cushion against the litigation risk. Needless to say, he was jilted like a prom attendee on the night of the big dance.Digressions aside, it seems that MasterCard investors once again fear what the future may bring, this time because of margin pressures rather than lawsuits. The company posted rather brilliant across-the-board numbers, but the stock fell almost 10%.What gives? Most of the fears seemed to be attributable to a couple of comments made during the earnings call. One analyst noted that operating margins (excluding special items) improved nearly 300 basis points to 19.5% -- the company targeted 100-200 basis points of improvement per year -- and asked whether the company could continue such a trajectory. In response, CFO Chris McWilton candidly replied that the company didn't have any rabbits to pull out of a hat, but would continue to leverage its brand, network and technology -- in other words, keep pushing its obvious competitive strengths. McWilton also noted that pricing increases had been a pretty major driver in 2006 and that this wouldn't recur in 2007, noting, "There could be some pressure on margins."After hearing the words "pressure" and "margins" in the same sentence during an earnings call, I would normally stop right there, run to the rooftop, and yell "SELL!" at the top of my lungs. But as I mentioned, MasterCard is a pretty solid company, so let's not panic just yet.During the call, in response to a comment that Visa was also going public, management noted that the market could get competitive, but that MasterCard's restructuring had put it "a little bit ahead of the curve." Also, the nation of Belgium has appointed MasterCard's Maestro product as its national debit brand. Other positives were the launch of a higher-end card with HSBC (NYSE: HBC) and Saks Fifth Avenue (NYSE: SKS), and Wal-Mart's (NYSE: WMT) warehouse retailer, Sam's Club, deciding to accept MasterCard.The advertising and marketing expenditures forecast appears to have been an overlooked issue. Two separate times during the conference call, McWilton used identical phrasing (and even pointed out that he was doing so) in noting that "You're going to see very modest A&M (advertising and marketing) growth in '07." He then followed this up with even stronger wording, noting that the A&M growth would be modest in absolute terms. Given that MasterCard grew revenues by 13% year over year in 2006, the A&M leverage could help mitigate some of the fears over margin pressure from a pricing standpoint. In fact, advertising and marketing accounted for 31.6% of sales in 2006 and 34.2% in 2005, about 250 basis points of difference.With its current price of more than $100 per share and its nearly $14 billion market cap, I can't tell you whether MasterCard is a buy. But I do believe that if MasterCard can achieve a decent fraction of the A&M leverage this year that it achieved in 2006, as the CFO seemed to point toward during the earnings call, that would go a long way toward helping the company achieve its targets of 8%-10% sales growth, 1%-2% operating margin improvement, and 20% return on equity.For more credit card commentary:Capital One's Bright FutureAmerican Express Expresses ConcernRounding the Second Curve: Part 2MasterCard and Wal-Mart are Motley Fool Inside Value recommendations. Discover more of the market's best bargains with a free 30-day trial subscription.Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates comments, concerns, and complaints. 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