Cramer's Investing Club: Mastercard's earnings, outlook for travel recovery justify stock price
Mastercard (MA) reported a top and bottom line beat for the fourth-quarter 2021. Net revenue of $5.216 billion (+28% YoY on a currency-neutral basis), edged expectations on FactSet of $5.174 billion, and adjusted earnings per share of $2.35 (+46% YoY on a currency-neutral basis) exceeded estimates of $2.21. As a quick note, there are a few specific terms worth being familiar with when analyzing the credit card industry, while we will do our best to provide a brief definition of all the ones mentions, Mastercard has also provided a glossary of key terms , which those interested. Breaking down topline results Domestic Assessments , "fees charged to issuers and acquirers based on the volume of activity on MasterCard-branded cards where the merchant country and cardholder country are the same," increased 24% YoY (currency-neutral) to $2.165 billion, barely missing the $2.183 billion consensus. Cross-Border Volumes Fees , "charged to issuers and acquirers based on the volume of activity on MasterCard-branded cards where the merchant country and cardholder country are different," increased 61% YoY (currency-neutral) to $1.380 billion, nicely beating the $1.325 billion consensus. Notably, this part of the business has come such a long way with overall fourth-quarter cross-border levels now higher than those in 2019. That comes even as cross-border travel levels remain below 2019 levels, though that part of the business is expected to fully recover by the end of 2022. It's a great sign that cross-border is moving in the right direction because this is a high margin business for Mastercard. Transaction Processing Fees grew 28% YoY to $2.987 billion, a smidge above the $2.966 billion consensus. The "Other" category , which comprises Mastercard's Cyber & Intelligence and Data & Services business, grew 30% YoY (currency-neutral) to $1.840 billion, a hair above the $1.739 billion expected. Rebates and Incentives , which are an offset to revenue came, increased 38% (currency-neutral) to $3.156 billion. Given this is an offset, the increase means that Mastercard offered up more incentives in the fourth quarter versus the year ago period. The result in the quarter was more than the $3.016 billion expected, representing a small negative. Key metrics driving results Worldwide Gross Dollar Volume (GDV) , the "aggregated dollar amount of purchases made and cash disbursements obtained with Mastercard-branded cards and the impact of balance transfer and convenience checks," increased 23% on a local currency basis to $2.113 trillion, exceeding expectations of $2.080 trillion, with $1.135 trillion coming from Debit/Prepaid Programs and $978 billion coming from Credit Programs. In the United States, GDV also advanced 23% to $6152billion with $334 billion from Debit/Prepaid and $319 billion from Credit. Rest of World GDV was also up 23% YoY at $1.460 trillion with $802 billion from Debit/Prepaid and $659 billion coming from Credit. Switched Transactions , the "authorization, clearing and settlement" of transactions, were up 27% to $31.4 billion. Additionally, cards issued by Mastercard customers reached 2.978 billion as of the end of the fourth-quarter, a 9% increase versus the year ago period. On expense side Adjusted operating expenses increased 19% (currency neutral) to $2.389 billion. Here's what drove that increase: General & Administrative increased 15% (currency-neutral) to $1.862 billion. Advertising & Marketing increased 42% (currency-neutral) to $338 million. Depreciation & Amortization increased 25% (currency-neutral) to $189 million. Shareholder return On the capital returns front, Mastercard returned $1.734 billion to shareholders via the repurchase of 3.7 million shares at a cost of $1.3 billion and $434 million in dividends. Additionally, quarter-to-date through January 24th 25, 2022, the company has repurchased 1.4 million shares at a cost of $528 million. This leaves $11.4 billion in the tank under the company's approved share repurchase program. Outlook As for 2022 guidance, management's base case scenario is for net revenues to grow at the high-end of a high-teens rate on a currency-neutral basis, excluding acquisitions, which are expected to add about 1 percentage point in growth. Meanwhile, foreign exchange is expected to be a headwind of about 1 to 2 percentage points for the year, largely due to the strengthening U.S. dollar relative to the euro. With analysts expecting revenues to grow about 19% YoY in 2022, we think Mastercard's guide was right in line. As for some other items, management expects operating expenses to grow at the low end of a low double-digit rate on a currency-neutral basis, ex-acquisitions and special items. Acquisitions are expected to add 4 to 5 percentage points to growth, while FX is expected to be a tailwind of 1 percentage point. For the first quarter, management expects net revenue growth at the high-end of a high-teens rate on a currency-neutral basis, excluding acquisitions. Acquisitions are expected to add about 2 percentage points to growth, but the impact of FX is expected to be a headwind of 2 to 3 percentage points. Net-net, this outlook was lower than the 22% growth rate analysts were expecting. However, we think Mastercard has guided the start of the year conservatively. This is our conclusion because if you take a look at the slide below from the company's earnings presentation, you will see that the YoY growth rate for all the key metrics remain above the revenue outlook, despite the early omicron headwind. Importantly, management made no changes to its 2022 to 2024 performance objectives which include a net revenue compound annual growth rate in the high teens, annual operating margin of at least 50%, and an earnings per share compound annual growth rate in the low twenties. Stock impact Overall, Mastercard delivered a very solid quarter. While the full-year 2022 outlook was more or less in line, we think it was better than feared, possibly explaining why the stock has held onto its gains Thursday afternoon despite another ugly reversal for the broader market, which has gone negative for the day as of this writing. Our thesis remains intact here. Mastercard is still a huge beneficiary of the secular trend from cash to card and electronic payments. And a full recovery in cross-border travel is the one last missing piece to this consistent, above-market growth earnings story. But valuations matter, too — and like many fintechs, Mastercard trades at a premium multiple in the market, at roughly 33x 2022 earnings. Highly profitable companies that are growing the bottom line at a low-twenties percent rate — like Mastercard plans to do over the next three years — are worth that type of premium in our view, even as interest rates move higher. That's why we are still holding on to MA in the portfolio. (Jim Cramer's Charitable Trust is long MA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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A 3D printed Mastercard logo is seen in front of displayed stock graph in this illustration taken September 20, 2021. Dado Ruvic | Reuters