MasterCard (NYSE:MA) has been able to navigate the economic uncertainty that has gripped most U.S. companies through the last five years. The company’s stock has been rising steadily on positive earnings growth through the financial crisis. Revenues have grown at a compounded annual growth rate (CAGR) of 14% since 2007 while the growth rate for gross profits has been around 13%. An increased focus on markets outside of the U.S. is one of the main reasons that MasterCard has been able to maintain this growth rate. In 2007, half of the company’s gross dollar volume (GDV) came from the U.S. while Asia Pacific and Latin America contributed just 13% and 7%, respectively. In 2012, the contribution from Asia grew to nearly 30% while Latin America accounted for 10%. While the U.S. is still the single biggest market for MasterCard, its contribution to the company’s GDV has declined to just around 30%.
The CAGR for MasterCard’s GDV from Asia has been around 25% through the last five years while that for Latin America has been close to 15%. The U.S. market has been more or less stagnant during this period, partly due to the economic crunch. The country’s GDV has been growing at a CAGR of just 2%. Emerging economies like India, China and Brazil will drive market growth in Asia and Latin America in the coming years, but it is up to MasterCard to capitalize on this growth. Increased penetration in these markets could provide significant upside for the company’s stock.
Our price estimate for MasterCard is $660 in-line with the current market price.
Personal consumption expenditures (PCE) have been growing at an average compound annual growth rate of 10% in developing markets of India, China, Mexico, Brazil, Russia, Indonesia, South Africa and the UAE.  In contrast with the U.S. where electronic payment solutions account for 60% of the PCE, paper-based transactions dominate these emerging markets accounting for 60% of the PCE. India and China are two of the fastest growing markets with $1 trillion and $1.3 trillion in PCE, respectively.
Electronic payment penetration is quite high in China with paperless transactions accounting for two-thirds of PCE in the country. This is due to rapid expansion of China UnionPay (CUP), which is backed by the Chinese government. Regulations require that all merchants and ATMs across the country accept UnionPay cards and all cards issued in China work with UnionPay. These regulations restricted both payment giants Visa (NYSE:V) and MasterCard from expanding in an economy they entered more than 20 years ago. 
In contrast, India has high potential for growth in the coming years. Cash and checks still account for 92% of personal consumption transactions in the country. India’s real gross domestic product (GDP) growth rate was around 8.4% from 2009 through 2011, and despite a slowdown, was still a respectable 6.5% in 2012. The country’s gross national per capita disposable income has been growing at a CAGR of 15% for the last three years.  PCE as a percentage of GDP is roughly 50% in the country, but we expect higher expenditures as disposable income continues to grow.  The GDP is expected to grow at an average rate of 4.7% through 2018  Should PCE as a percentage of GDP expand to about 60%, India can generate around $1.6 trillion in personal expenditures by the end of the decade.
The country has adapted well to mobile phones with nearly 70% penetration. ((List of countries by number of mobile phones in use)) Mobile phones are emerging as a means of extending financial services in lieu of an underdeveloped banking system with transactions involving SMS based payments, direct mobile billing using PIN and one time password (OTP) authentication and mobile web payments. ((Global mobile payment transaction volume from 2011 to 2016 (in billion U.S. dollars))) This will help increase electronic payment penetration in the country in the coming years. Even if paperless technology penetration grows from 4% to 25% by the end of the decade, India would still present a $400 billion gross dollar volume opportunity for Visa and MasterCard. With no local company to provide a challenge to the global leaders, the market is up for grabs.
Brazil is the fourth largest payment card market in the world and the biggest in Latin America. Credit, debit and private-label store cards in the country have grown from 400 million in 2010  to 687 million in 2011 and around 750 million in 2012.  Visa and MasterCard are dominant players in the market with a majority of the cards in the country carrying their logos.  Personal consumption expenditures (PCE) were around $723 billion in 2012, only 44% of which were through electronic payment media.  The GDP growth rate in the country has slowed down significantly, from 7.5% in 2010 to 2.7% in 2011 and 0.9% in 2012.  PCE as a percentage of GDP is currently around 30%.
The unemployment rate in the country is near a record low at less than 6%, indicating that the economy is poised for a long-term recovery.  We expect PCE as a percentage of GDP to improve to about 35% as consumer spending increases with improvements in the economy. In this scenario, PCE would breach the $1 trillion mark by the end of the decade.
Electronic payment methods are rapidly gaining acceptance in the country. Brazil is the 12th largest market for online payments with payment volume in excess of $17.4 billion. We expect electronic penetration to increase from 44% of PCE to around 60% of PCE by 2020, providing a $650 billion market for Visa and MasterCard to capitalize on.
Based on recent trends, we anticipate a near-term growth rate of 10% for MasterCard’s GDV and expect that to taper off to around 7% by the end of the decade. However, should MasterCard perform better than expected in the developing markets, it could well maintain a 15% growth rate through our forecast period. There is 20% upside to our price estimate for the company’s stock in this scenario.Notes:
- Visa Investor meeting for 2013 [↩] [↩]
- WTO China UnionPay Ruling Paves Way for Visa, MasterCard, China Briefing, 6th September, 2012 [↩]
- Indian Economy, DABUR INDIA LIMITED, UBS India CEO/CFO Forum [↩]
- Figures for GDP growth are taken from the World Bank’s website [↩]
- Comparison of Base Scenario with Optimistic and Pessimistic Scenarios, 2013 – 2025 (January 2013) [↩]
- Payment Cards In Brazil, Datamonitor, April 2012 [↩]
- Rich Opportunities for Prepaid Cards in Brazil [↩]
- Report On The Brazilian Payment Card Industry [↩]
- GDP growth (annual %), The World Bank [↩]
- UPDATE 1-Brazil’s jobless rate up to 5.8 percent in April, Reuters [↩]