Why You Should Bet With Buffett on MasterCard
Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) placed a big new bet on MasterCard (NYSE: MA) in the first quarter. Should you follow him into the stock?
Buffett's stake was disclosed in a 13F filing totaled 216,000 MasterCard shares valued at $60 million -- a tiny portion of its $53.6 billion equity portfolio. On the face of it, a stake in MasterCard could be a bet by newly hired investment manager, Todd Combs, on an increase in consumer spending.
But let's look deeper at MasterCard. The Purchase, NY-based company supports provides credit, debit, and prepaid programs for 22,000 financial institutions. And MasterCard's economic performance of over the last five years has been impressive. After all with $5.73 billion in sales growing at an average of 13.5% a year since 2006 and net income of $1.95 billion spiking at a 47.2% average annual rate over that time frame, MasterCard is a profit growing machine with an impressive 34% net profit margin.
But what has MasterCard done for investors lately? In the first quarter of 2011, the number of transactions climbed 11% and volume growth rose13% while client losses fell further. Revenue grew 15% to $1.5 billion with operating margin of 55.7% up 2.2 percentage points. MasterCard's EPS of $4.29 increased 24% and beat Lazard Capital Markets' forecast of $4.10. And MasterCard boosted its EPS estimates for 2011 to $17.15, up 14%, and to $20.16 for 2012, up 1%.
Does this performance mean that you should add MasterCard stock in your portfolio? To help with that decision, we can look at its Price/Earnings to Growth (PEG) ratio -- a way to determine whether the value that the market assigns a stock is justified by the rate at which it expects the company's earnings to grow. I think a PEG of 1.0 is a fair price and anything below that is a bargain.
MasterCard's PEG of 1.07 is a reasonable value. Its P/E is 18.8 and MasterCard's earnings are expected to grow 17.5% in 2012 to $19.99. With Buffett's backing and the real chance that it can sustain a higher earnings growth rate based on its performance over the last five years, buying MasterCard stock could be a profitable addition to your portfolio.
Buffett's stake was disclosed in a 13F filing totaled 216,000 MasterCard shares valued at $60 million -- a tiny portion of its $53.6 billion equity portfolio. On the face of it, a stake in MasterCard could be a bet by newly hired investment manager, Todd Combs, on an increase in consumer spending.
But let's look deeper at MasterCard. The Purchase, NY-based company supports provides credit, debit, and prepaid programs for 22,000 financial institutions. And MasterCard's economic performance of over the last five years has been impressive. After all with $5.73 billion in sales growing at an average of 13.5% a year since 2006 and net income of $1.95 billion spiking at a 47.2% average annual rate over that time frame, MasterCard is a profit growing machine with an impressive 34% net profit margin.
But what has MasterCard done for investors lately? In the first quarter of 2011, the number of transactions climbed 11% and volume growth rose13% while client losses fell further. Revenue grew 15% to $1.5 billion with operating margin of 55.7% up 2.2 percentage points. MasterCard's EPS of $4.29 increased 24% and beat Lazard Capital Markets' forecast of $4.10. And MasterCard boosted its EPS estimates for 2011 to $17.15, up 14%, and to $20.16 for 2012, up 1%.
Does this performance mean that you should add MasterCard stock in your portfolio? To help with that decision, we can look at its Price/Earnings to Growth (PEG) ratio -- a way to determine whether the value that the market assigns a stock is justified by the rate at which it expects the company's earnings to grow. I think a PEG of 1.0 is a fair price and anything below that is a bargain.
MasterCard's PEG of 1.07 is a reasonable value. Its P/E is 18.8 and MasterCard's earnings are expected to grow 17.5% in 2012 to $19.99. With Buffett's backing and the real chance that it can sustain a higher earnings growth rate based on its performance over the last five years, buying MasterCard stock could be a profitable addition to your portfolio.
posted by petercohan at 5:48 AM
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