Model Portfolio rmcduff:RMG1

While some might question the short term price of Mastercard Incorporated (nyse: MA), I consider the investment thesis to be better than buying eBAY some years ago.

MA was incorrectly priced from the outset, as investors and analysts evaluated the stock as though it was a credit card company. Originally, the few analysts that covered the stock simply lumped MA into a peer group with American Express and a number of other publicly traded credit card firms.

All credit card companies have to deal with bad debts, but MA doesn't. It is not even a credit card company, but is a brand name that franchises out its brand and technologies to all the banks which use the MA trademark.

In point of fact, MA is a processor of payments and an oligopoly, with technology and placement that will enable the company to remain at the forefront of both debit and credit card processing. It is a dominant force in Europe, and its Maestro payment processing systems are poised to become the European standard in the near future. Europe is harmonizing its debit systems, and will require banks to clear through just one system by 2010. Visa apparently does not even have the technology or systems in place to provide a competent bid, which makes MA a virtual shoo in for this business.

If one thinks of MA vs eBAY, one could easily make a case for suggesting that MA is still very undervalued.

1. MA has no delinquencies, no missed payments and no product returns. Those issues are the responsibility of the franchisees (the various banks and firms like MBNA which assume the credit risk). eBAY generates a lot of revenue, but has to to factor in bad debts every quarter. MA has higher gross and net margins than eBAY, and faster growth. Far more people worldwide will use the services offered by MA than eBAY
2. Both MA and eBAY have limited competition, and global reach. Both are debt free and generate more cash than they require.
3. eBAY has a current enterprise value of almost $44 billion, whereas MA's present EV is just $21.3 billion.

So, while I don't diagree that the share price of MA is high, and is certainly approaching what I would consider fair value, the next couple of years could take this stock to a market cap that I feel will surpass eBAY.