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Free Cash Flow Analysis of Mastercard Inc (NYSE: MA)

Mastercard is a common household name all across the globe. If you’ve owned a debit or credit card, chances are you’d have used one of Mastercard’s core services – being a payment gateway.

Mastercard’s business model is simple – charging fees for using its payment network.

A Straightforward Revenue Model

Mastercard, just like its main rival Visa, collects two main kinds of fees –

(1) Transaction Fees: Fees charged to card-issuers such as Bank of America or OCBC Bank based on the payment volume on products embedded with Mastercard technologies.

For every transaction, Mastercard charges a commensurate fee for its behind-the-scenes services that include authorization, settlement and connectivity – so that consumers can successfully use their cards anywhere in the world to send secure payments to merchants.

As identified by The Motley Fool, this source of revenue proves to be a hedge against inflation because as prices of consumer goods and services rise, fees collected will proportionally increase as well.

(2) Cross-border Transaction Fees: Mastercard also charges financial institutions a currency conversion margin and a fee for consumers to make cross-border transactions. Most, if not all, of the banks pass on these fees along with an additional margin to consumers.

Free Cash Flow (FCF) vs. Earnings Analysis

One of the key ways to uncover financial statement irregularity is through the side-by-side comparison of FCF and Earnings. 

For Mastercard, I did a Bloomberg 20-year analysis of both metrics and the results are shown as follows:

Mastercard Inc FCF (white line) and Earnings (EPS – blue line, Revenue – brown line) plotted on the first chart

As you can see, the two metrics – FCF and earnings – are very consistent with each other. This means that the GAAP earnings being reported are mostly actual cash flows into the company’s coffers. Thus, we will not have to worry about buildups of Accounts Receivables or Inventories or any form of third-party circular transactions.

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We now take a look at the lower chart where Capital Expenditures are plotted. A downtrend is shown, indicating that more capital expenditures are being used over the course of 20 years.

This isn’t necessarily a bad thing. In fact, the reason why I placed both the FCF/Earnings chart on the top and CapEx chart on the bottom is to show how management has been allocating its cash very efficiently to improve FCF/Earnings. This is indicated by how the FCF or Earnings curves are almost a mirror reflection of the CapEx curve.

We also notice that in recent years, the CapEx curve seemed to be steeper as compared to before. Also, the increased CapEx doesn’t seemingly show commensurate growth in FCF or earnings. Why is that so? Does it mean that management has lost its touch in putting its cash to good use?

To asnwer that question, we have to dig deeper to find the reasons for the added use of cash for long-term projects. After a quick Google search, we find the answer.

Mastercard had been in the process of acquiring a mobile payments solution company called Oltio. It had recently completed the acquisition in March 2018 for an undisclosed amount.

Such an acquisition is difficult to value quantitatively without knowing how much Mastercard paid for it, but we can get some ideas on value-added of the acquisition by taking a step back to look at the opportunities Oltio presents for Mastercard and Oltio’s track record.

Emerging Synergies and Opportunities

According to The Motley Fool, Mastercard’s acquisition of Oltio presents it with the opportunity of growth in emerging markets and the untapped potential of mobile payments.

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It is believed that 80% of all transactions in the world are still being made using cash as a medium. With Oltio’s mobile capabilities and Mastercard’s diverse distribution networks, it would be easy for Mastercard to onboard consumers to switch to electronic payments by incentivizing its partner financial institutions in offering rebates and rewards. 

The Proof is in the Pudding

Fundamentals are one thing – but does it reflect in the share price? Let’s take a look:

This is Mastercard’s share price pulled from Google. It is every value investor’s goal to own stocks that reflect this type of growth.

Want to Know of Similar Companies Like This?

You may still be a bit skeptical and think that this is a fluke. I assure you its not.

I have pulled up a list of companies that have gone on to become multi-baggers over the course of the last 20 years and digging deeper, it is not surprising that many of them have similar curves like the one above.

Of course, there are also companies that do exceedingly well in share price, but their curves just don’t seem to have that spark. In my analyses, I only stick to my circle of competence, supported by strong fundamentals, and choose not to invest in the rest.

I reveal the names of these 9 companies and their individual in-depth analyses as well as possible entry prices in my premium investing newsletter that you can get a monthly subscription for real soon.

Till next time.

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