finance project

Finance 6630 Project

Kelsey Towns

Auburn University Montgomery

Tewhan Hahn

7/14/2020

FINANCE 6630 Project, summer 2020

Part 1. Estimating Expected Return

I. The Case Company name and Ticker symbol

Case Company	Ticker Symbol
MasterCard	MA

II. Business description

MasterCard Incorporated is a well-established payment processing network that is a leading innovator within the financial services industry. The company operates in over 150 countries world-wide and offers impeccable products and services to consumers globally. Our team outlines the company’s current financial position, by thoroughly analyzing the business’ ratios, financial statements, and stock performance.

MasterCard is a payment processing network that connects consumers, governments, financial intuitions, merchants, and businesses across the world. Specifically, this business processes payments between banks of merchants and the card issuing banks/credit unions of the purchasers. MasterCard is a successful company that has been publicly traded since their IPO announcement in 2006. The firm is well-established; with steady growth, positive forecasts, and solid returns for shareholders. Aside from 2013, the businesses book value per share has been steadily rising since 2008. As a stable company, the ascension of MasterCard’s payout ratio to 21% as of the end of 2019 is profitable for current shareholders. Despite being promising for potential investors, it begs the question if it’s appropriate and sustainable for MasterCard to have such a positive payout ratio. The company’s net income has been increasing since the 2008 recession, which indicates that the company is in a solid financial position to be increasing their payout ratio in conjunction with net income.

Over the last five years, the dividend yield has increased to 74% at the end of 2019. It is projected to increase to 88% by the end of 2020 (Morningstar - Stock Performance). Although, a favorably high percentage, dividend yield can’t be analyzed without considering the stock price. Not only has the stock price increased significantly over the last 14 years, MasterCard’s total returns are well above the total returns of indices in U.S. growth, dividend leaders, and credit services (Morningstar - Stock Performance). Among its competitors, MasterCard ranks among the top three in growth with only Visa Inc. and PayPal Inc. currently experiencing higher growth.

Please shorten business description to a paragraph and have a separate section of “how Ma makes money.”

III. Bulls and bears

1. Pros and Cons

Bulls

· MasterCard is a world-renowned credit card company that uses technological innovation to create safer, faster and more efficient payments. MasterCard’s products have been marketed towards average North American’s since the mid 1900’s.

· The company was established in the United States in 1966, as the Interbank Card Association (ICA). In 1969, the ICA acquired “Master Charge” and a decade-later was renamed to MasterCard. The multinational corporations’ headquarters are in Purchase, New York. The firm’s mission is to use their top-notch technology to make payments safe, simple and smart.

· To differentiate from the competition, MasterCard introduced new products such as traveler’s cheques and credit cards that featured laser holograms to prevent fraud. MasterCard adherers to their four values; trust, partnership, agility, and initiative to make customers gain the full experience when choosing their products and services.

Bears

· MasterCard’s main competitors, Visa and American Express, have been close rivals since the firms’ entry into the market. These three companies have different credit terms, interest rates and features, but there isn’t much else that differentiate them.

· Due to the brand’s similarities, consumer’s make purchase decisions by evaluating the benefits sought from perks and features. Both MasterCard and Visa operate in over 150 countries, while American Express only targets consumers in 40 countries. All three of these companies sponsor a variety of high caliber sports. For instance, Visa sponsors the Fifa World Cup and the Olympics. American Express is the main sponsor for the NBA and MasterCard is the sponsors of the PGA tour and Champions League to name a few.

· MasterCard revamped their logo in 2016 from moving the words MasterCard from inside the two inter-locking circles to beneath it. They have red and yellow circles inter-locking and the red circle stands for Vitality, while the yellow circle stands for happiness, richness, and prosperity which goes with MasterCard slogan “Priceless”. With the priceless campaign, MasterCard was able to incorporate the slogan into commercials at all their major sport sponsorships; making that campaign one of the most known campaigns to date.

2. My evaluation of MasterCard future performance and why?

I did assess the important and relevant ratios for MasterCard, I was able to conclude that the company’s sound financial position makes the business worthwhile for investment. I examined and analyzed various data that illustrates MasterCard’s overall growth from 2007 to 2019. From the information I analyzed, I can indicate that net income, revenue and earnings per share have increased respectively. These values offer potential investors the opportunity to understand MasterCard’s strengths and abilities. For example, the company’s 2019 revenue was $10,776 billion which was a 10% increase from the previous year’s sales. Whereas, net income was $4,059 billion in 2019; this is a 6% increase from the following year’s net income. MasterCard’s 2016 earnings per share (EPS) was valued at $3.69 with a 10.15% increase from 2018. As shown, the company is growing and increasing annually, which indicates that the business is improving efficient and effectiveness. The company’s current ratio is valued at 1.84, which shows that the company can pay both short and long-term obligations. The firm’s CA should be at least 1.5, which means that the company has a healthy current ratio. MasterCard’s debt to equity ratio is 0.92, which illustrates that for every dollar of equity the business borrows 0.92 times. For every dollar MasterCard has a higher stock value than its competitors, which is discussed in detail below. This shows that the company has a solid book value per share due to its ability to issues so many stocks annually. Since 2007, the book value per share has increased by 3.44%. This indicates that MasterCard has a good level of safety for each individual share after all debts are paid. In terms of working capital, MasterCard is doing remarkably well, due to the fact it has increased by 2.703 since 2007 to 2019. This show that MasterCard is more invested in current assets because it exceeds current liabilities by a significant margin. The business’ return on investment capital percentage is 41.23% which shows MasterCard’s efficient of investment and measures the amount of return relevant to the cost. Visa, however, has a yearly ROI of 10.7%, which is strong indicator that MasterCard is a more effective and worthwhile investment for the future.

Investors and other stakeholders use financial statements to analyze and interpret a corporation’s performance and position over the years. MasterCard’s balance sheet and income statement have indicated that the company has shown some minor financial issues, however, overall, they have shown consistent development and growth.

Increase in Long Term Debt: Over the last year, long term debt has increased by 1,912 million dollars. The debt was most likely entered to support the ongoing share repurchase program. MasterCard also owes $5,393 million due to their Capital Lease Obligation.

Constant Increase in Operating Income: MasterCard has been turning a higher profit margin of its revenues while expenses increase at a slower rate causing an increase in operating income.

Net Income: By keeping their expenses consistent and enlarging their revenues, MasterCard has been able to regularly increase their net income at a fixed rate.

Constant Increase on Earnings Per Share: Due to ongoing share repurchase program MasterCard had put in place MasterCard has been able to decrease the number of outstanding shares while increasing their net income, which has caused a constant increase on earnings per share.  

Dividends: MasterCard has used their debt to acquire common stock, which has caused a large portion of their long-term debt. MasterCard organizes this repurchase to provide a higher dividend per share they have each year. This has seen a consistent increase ever since the program started in 2017.

While financial information analysis above is appreciated, your summary should primarily include qualitative assessment of MA’s prospects based of prior sections and other sources.

3. Target stock price

Given the evaluation and analysis of the business’ past performance and financials, it can be concluded that investing in MasterCard is beneficial (Good). Due to our examination of the company’s stock, financial statements, and company practices, we predict that potential investors can expect to reap high returns on investment. On that note, I assign 56% to Good, 36% to Normal, and 8% to Bad business situations for MasterCard based on the evaluation.

IV. Analysts’ Target Stock Prices (Low, Average, High) from Yahoo Finance are:

Low = 161.64, Average = 191.98, High = 274.36,

Good: (161.4-112.6)/112.6

1-0.4326=0.5674

Normal: (191.982-117.6)/117.6

1- 0.6325= 0.3675

Bad: (274.36-141.8)/141.8

1-0.9349=0.0651

V. Expected return Please check your prices below. For example, today’s price for MA is $299 but you are using $149.

Current Stock Price:	$149.56
Business Condition	Probability	Possible Price	Possible Return	Prob. x Possible Return
Good (High Price)	0.5674	182.4	69.198	39.26
Normal (Avg. Price)	0.3675	116.67	28.668	10.535
Bad (Low Price)	0.0651	83.74	3.64	0.237
Expected Return				2904/100= 50.03% annually

Part 2. Estimating the stock’s beta and required return

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.536547
R Square	0.267306
Adjusted R Square	0.275863
Standard Error	0.057709
Observations	60
ANOVA
	df	SS	MS	F	Significance F
Regression	1	0.071928	0.071928	22.36644	1.48E-05
Residual	58	0.186522	0.003216
Total	59	0.258451
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	0.010234	0.007711	1.327082	0.189682	-0.0052	0.02567
Ret_sp	1.073694	0.271433	4.729317	1.48E-05	0.740361	1.827026

Beta of MasterCard = 1.07

Required rate of return formula (rcase firm) = rf (free rate of return) + (rm (market rate of return) – rf (free rate of return)) x beta case firm.

=Risk free rate = 3%

Beta of the stock = 1.07

Market rate of return = 3% + 1.07% (6%) = 9.42%

Therefore, the required return of the stock is 9.42%

You need to explain MA’s beta as well(please see project description in the blackboard.)

Based on the equation the concept of required return as it is used by investors to decide on the minimum amount an investor can decide to invest on the stock based on the level of risk. The required return for a stock with a higher beta relative to the market should have been higher since it is necessary to compensate investors for the added level of risk associated with the investment. An investor can also use the required returns for ranking the assets and eventually make the investment as per the ranking and include them in the portfolio. In other words the higher the expected return the better the asset.

Part 3. Evaluating Stock’s Over- or Under- Pricing

i. Comparing the required rate of return 9.42% and expected return 50% indicates that the stock is underpriced.

ii. Analysis of technical data can effectively educate investors on potential rewards and risks associated with the investment in MasterCard Incorporated.  MasterCard’s initial public offering occurred on May 25, 2006. This date marks MasterCard’s transition to a new corporate governance and publicly traded ownership structure. At this time, MasterCard stocks were traded on the New York Stock Exchange under ticker symbol MA for $4.28. The stock’s history of return has increased rapidly since 2006, at a current stock value of $149.56. Given this information, the MA shares have increased by 3,494% in the last 11 years. Therefore, if an individual invested $5,000 in MasterCard stocks in 2006; their shares would be worth $174,718.62 today. However, the MA shares have been subject to minor fluctuations in the past, such as the eight-month 44% stock price decrease during the 2008 recession. This economic recession highly affected the global stock market due to loss in employment and income. Another research article you are quoting here should provide recommendation and economic reasons, not technical analysis (i.e., price trend etc.), supporting the recommendation.

iii. This section should provide your summary of list of reasons to buy and list of reasons to sell and then explain which list dominates the other. Then you can make final recommendation with most compelling reasons behind it. Within the last five years, the MA stocks have increased by approximately $23 per year. MasterCard’s lowest growth, within this timeframe, was in 2018, due to the stock market pullback on August 25th. This plunge was a result of an oil price drop that decreased investment and financially affected many companies in the United States. In the last twelve months, MA has grown exponentially, increasing by approximately 46%. This is may be attributed to recent positive press releases that have created effective public relations. This includes MasterCard’s recent partnership with MLB to offer fans a Stand up To Cancer message during the World Series. MasterCard also received praise for launching a “Grow Your Biz Contest” to support small businesses. Nonetheless, the company’s Relative Strength Index (RSI) is valued at 67.42. This indicator evaluates the momentum and strength of a security’s recent price performance. Traditionally, values over 70 indicate that a stock is overbought and overvalued which can result in a pullback. Therefore, the MA stock is increasing at a desirable rate. MasterCard’s competitors, which include Visa, American Express and PayPal, all have lower stock prices than MA. The company’s stock continues to grow each year with a $48.94 increase since December 30th of 2019. However, Visa, their main rival, has current stock price valued at $111.97 which is $40.77 off from MasterCard’s current stock price. Lastly, the company’s current price to book ratio is 25.03, because the company’s stock is $149.56 and the book value per share is $6.10

Conclusion

Given the analysis of MasterCard’s sound financial position, we can concluded that this company’s stock is a stable investment. The business has impressive profitability, long-term solvency, and liquidity ratios that indicate the firm’s ability to grow. MasterCard also has a high return on investment ratio over its main competitor, Visa. The company has had exponential stock growth by 3,494% in the last 14 years; and their shares are priced higher than their competitors. However, MasterCard has increasing long-term debt obligations, such as their $5,939 million for their capital lease obligation; which has been occurred to support growth. Nonetheless, investors can expect high returns on their investment from a well-established and profitable company.

Reference

“Mastercard Inc A.” MA Mastercard Inc A Key Statistics | Morningstar, 27 Nov. 2017, 

Lahiri, Diptendu. “Mastercard to Buy Back Shares Worth $4 Billion.” Reuters, Thomson Reuters, 6 Dec. 2016, 

Mastercard Long-Term Debt & Capital Lease Obligation (MA), www.gurufocus.com/term/Long-Term+Debt/MA/Long-Term-Debt--Capital-Lease-Obligation/Mastercard-Inc.

“MA Balance Sheet.” NASDAQ.com

“Mastercard Shares Outstanding:” YCharts, 27 Nov. 2017, ycharts.com/companies/MA/shares_outstanding. “Mastercard Incorporated (MA) Earnings Per Share.” NASDAQ.com, 27 Nov. 2017,  “Visa Inc Class A.” V Visa Inc Class A Key Statistics | Morningstar, 27 Nov. 2017, 

“Mastercard Incorporated Common Stock Historical Stock Prices.” Mastercard Incorporated Common Stock (MA) Historical Prices & Data - NASDAQ.com,

“MA Historical Prices | Mastercard Incorporated Stock.” Yahoo! Finance, Yahoo!, 27 Nov. 2017, 

“MA : Summary for Mastercard Incorporated.” Yahoo! Finance, Yahoo!, 27 Nov. 2017, 

“MA Stock Price - Mastercard Inc. Stock Quote (U.S.: NYSE).” MarketWatch, 

“We've Been Making History for 50 Years.” Mastercard History & Key Milestones

By. “Mastercard and MLB Deliver In-Stadium Augmented Reality Experience at 2017 World Series.” MarketWatch, 30 Oct. 2017

By. “Technical Research on Credit Services Equities -- SLM Corp., American Express, LendingClub, and Mastercard.” MarketWatch, 15 Nov. 2017

“Mastercard Inc A.” MA Mastercard Inc A Stock Upcoming and Historical Dividends

and Splits