Top Picks 2020: Mastercard (MA)

01/08/2020 5:00 am EST

Focus: FINANCIALS

Jon Markman

Editor, Tech Trend Trader, The Power Elite, and Strategic Advantage

Digital transformation, as an investment theme, gets bandied around a lot. It looks good in corporate press releases but few companies are really getting it done. Fewer are essential. Mastercard (MA) ticks both boxes, asserts growth stock expert Jon Markman, editor of Strategic Advantage.

The payment processor — my conservative pick for 2020 — operates on a global scale. The company has business partnerships with leading financial institutions all over the world.

More important, Mastercard managers, along with leaders at Visa (V), its major competitor, have been left alone to figure out the future of digital payments. Newsflash: They’re thinking big.

Imagine millions of machine-to-machine transactions. For example, the computer in your car will be able to seamlessly transact payments with gas pumps and car washes. And everything will share a connection in the cloud with your personal, encrypted financial information. It always will be on. After a while, you’ll wonder how you ever lived without it.

The idea is part of a bigger plan to eliminate cash payments everywhere, and Mastercard has lots of allies in high places with strong incentives to get it done. Banks win because a cashless society means more accounts. Governments win because tracking taxes and skewering black marketeers is easier. Mastercard wins because it collects a fee, albeit a small one, for every transaction it processes.

The proliferation of biometric sensors on billions of smartphones means this transition is way closer than most investors think. For example, it already happened in India, where every man, woman and child has a unique digital identity authenticated by a fingerprint or retinal scan.

Meanwhile, the credit and debit card business is smoking hot, spurred by eCommerce and online banking growth. Annual sales reached $14.9 billion in 2018, and they are protected at $16.9 billion for 2019, and $19.1 billion in 2020. Profits were $5.9 billion in 2018. That’s a margin of 39.2%.

Despite these impressive metrics, shares trade at only 35.1x forward earnings. The market capitalization, at $303 billion, could easily reach $409 billion based on the credit and debit businesses alone — for a potential gain of 30% in 2020.

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