Mastercard (MA) Q1 Preview, No Trade.

by CC May 1, 2012 1:43 pm • Commentary

MA reports Q1 earning tomo morning before the market opens.

The options market is implying about a 5.5% move* following earnings which is fairly shy to the 4qtr avg move of about 7.4%.  Interestingly the prior 4 qtrs there was not a ton of movement post earnings and the stock only moved about 1.5%.  So the average over the last 8 qtrs has been about 4.5%.

*with the stock at ~$465, the May weekly $465 straddle was offered at about 25.50, so if you were to buy that you would need about a 5.5% move either way to break-even by Friday’s expiration.

Fundamental story:

Mastercard’s path to all-time highs has been aided by the classic “moat” of the payments industry, the same moat that Warren Buffet likes to refer to when he talks about a business with high barriers to entry.  Maybe not surprisingly then, Mr. Buffet’s Berkshire Hathaway has invested in both Mastercard and Visa in the last year, with solid gains to show for it.  While mobile payments are the trend of the future, the newcomers to the game (like GOOG and AAPL) are discovering that they still need to work with the 2 payment processing behemoths to operate their mobile payment schemes, positioning V and MA at the forefront of non-cash payment growth, whether through card or mobile.  That is the main reason why last year’s debit card restrictions only had a short-lived impact on the stocks, as regulating the U.S. debit card industry is a classic example of regulators focusing on where the ball used to be.

The real question for an investor or trader in these names now is whether their recent strong runs have led to frothy valuations.  Looking at MA specifically, it has had consistent near 20% growth for the last 3 years, with guidance on a similar path.  Based on analyst estimates for $25-$26 EPS in 2013, 1 yr forward P/E is around their growth rate, though the trailing P/E is closer to 30.  On that basis, a higher stock price from here likely has to come from higher earnings rather than the ample multiple expansion of the past year.  At all-time highs and after such a strong run, using options whatever your fundamental view in the name makes sense.


Implied vol is about at its historical mean:

[caption id="attachment_11118" align="aligncenter" width="547" caption="MA HV30, IV30 and IV360 from LiveVol Pro"][/caption]


So with the stock trading at all time highs, and up almost 25% ytd this is not our cup of tea. But if you wanted to play for a rally inline with the implied move one of the only trades that seems to make any sense would be the May4th weekly 475 / 490 call spread, but that is offered at 4.50 with the stock ~465 .  Risk 4.50 to make 10.50 if the stock is up 25.00.   Not the sort of risk reward we generally like.

For those looking to play for some downside to the implied move, the May4th weekly 455 / 440 Put Spread sets up very similarly with the stock about 465, that $15 wide put spread is offered at about 4.75.

One last point if you do trade options in this name and especially on multi-leg trades, be sure to use limits, the bid ask is very wide.