MasterCard has gradually grown into one of the largest corporations in America. Its 4 year daily chart is a sight to behold, as the stock broke its rising 200 day moving average in April for the first time since December 2010, an incredible uptrend that lasted more than 3 years:
The consistency of MA’s sales and earnings growth is partly a factor, though there are many other stocks with similar growth trends which do not exhibit such consistent price action. MA has grown sales at a consistent rate of 10-25% per year over the last 4 years, and earnings have grown 15-35% annually in that period. Projected sales growth over the next 3 years is 10-15%, and projected earnings growth is 15-20%, again, impressive numbers going forward.
Of course, Mastercard’s duopoly along with Visa is a strong part of the bull case, since investors are much more comfortable with the long-term outlook for MA’s sales and earnings growth when it is very difficult for competitors to build a rival payment network. Some investors have voiced concern about emerging payment technologies, but so far, most technological innovations have included MA and V as part of the platform rather than compete directly with them, which is an indication of just how entrenched the networks are in the payment system.
After another revenue and earnings beat this morning, MA management went through the usual touch points of the business. What’s impressive is that the business model is so strong, the business almost seems to run on auto pilot, with small effects around the world due to various country-specific events (like Russian spending at the moment).
So the business prospects are good. Why the recent selloff then?
Well, valuation in MA reached a 5 year high early this year, with its trailing 12 month P/E touching 30 for the first time since 2008:[caption id="attachment_39836" align="alignnone" width="600"] trailing 12 month P/E in MA, Courtesy of Bloomberg[/caption]
Back in 2008, MA was a $30 billion company with a much faster growth rate. Today, it’s a $90 billion behemoth, and growth rates have naturally slowed. So a lower valuation is justified, but just how low? That is what the market is working out right now.
Given the strong business prospects but elevated valuation and technical break, it looks like a period of consolidation is in store for MA. Zooming into the 1 year daily chart, the range to watch is $65 to $80:[caption id="attachment_39837" align="alignnone" width="600"] MA daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]
The 50 day ma is downward sloping, around $75, and the stock has gapped above it today, though that happened for a few days in mid-March before the selling resumed. On the upside $80 is the obvious resistance level. On the downside, $65 is longer-term support. Expect consolidation in that range after the stock’s break of the long-term uptrend.
Implied volatility in MA has moved lower after today’s earnings report, though since realized volatility has been higher than most of the past 2 years, implied volatility is not near its lows:[caption id="attachment_39838" align="alignnone" width="600"] MA 30 day implied volatility, Courtesy of Bloomberg[/caption]
At this point, MA range trades don’t look great (for example the MA July 66/70, 80/84 iron condor is only around $1.30, and the MA July 70/75/80 call fly costs 1.55ish), but we want to keep an eye out on MA in case implied volatility has another spike in the coming weeks, or MA tests either end of the 65-80 range.