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MasterCard Does Not Look Overvalued Compared to Historical Levels

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Price-to-earnings ratio

A company’s price-to-earnings (or PE) ratio is the ratio of its current share price to its earnings per share. The PE ratio of a company shows how much money investors are ready to pay for its stock, per dollar of a company’s earnings. A high PE generally suggests that investors are expecting higher future earnings growth for the company.

MasterCard’s (MA) PE ratio is close to 28. As the above graph shows, its PE ratio has grown steadily over the past four years. This indicates investors’ expectations of a generally consistent future earnings growth, which the company has achieved in recent years.

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MasterCard’s historical PE trend also suggests that its current PE is not exceptionally high or low compared with the historical PE. MasterCard’s PE has consistently remained lower than Visa’s (V) PE, and it is higher compared with American Express (AXP) and Discover Financial (DFS). The Technology Select Sector SPDR Fund (XLK) PE is currently near 20.

MasterCard offers high total returns

The above graph compares the cumulative five-year total return generated by MasterCard, the S&P 500 Index, and the S&P 500 Financials Index. MasterCard generated higher total returns compared with the S&P 500 Index and the S&P 500 Financials Index.

MasterCard’s growth strategy

The growth in US personal consumption expenditure directly impacts MasterCard’s business growth. It also depends on the growth in the use of electronic forms of payment instead of cash and checks, and how much of this growth MasterCard is able to capture.

MasterCard focuses on growth in its core business of credit, debit, prepaid offerings, and the number of processed transactions. At the same time, it is looking to diversify its customer base and to include smaller merchants and consumers who still use cash and checks. The company also aims to build its business by focusing on newer technologies and opportunities, as well as organic growth and acquisitions.

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