RBC Upgrades MasterCard To Top Pick, Sees 23% Upside

Mastercard Inc MA was among the best ideas in the payments, processors and IT services space “given our belief that investors should look to focus on long-term secular-driven stories that provide solid organic growth with opportunities for margin expansion,” RBC Capital Markets’ Daniel R. Perlin said in a report.

Perlin upgraded the rating on the company from Outperform to Top Pick, while raising the price target from $115 to $130. He mentioned five reasons for the upgrade.

Emerging From Trough Earnings

Driven by the global economic backdrop, MasterCard had witnessed challenging in generating earnings over the past couple of years. Perlin cited the following challenges:

• Lower gas prices.
• Currency headwinds.
• Weak emerging markets.
• European uncertainty and regulatory environment.
• Lower cross-border volumes.
• Heavy investment cycle.

Revenue Growth, Op-Ex Growth

MasterCard’s EPS growth had been volatile over the past several quarters with acquisitions and investments to build its information services business driving “wild swings in operating expense growth,” the analyst stated. “As the rate of change in operating expense growth slows relative to revenue growth acceleration, which we expect in FY17, MA should begin to generate more consistent EPS growth.”

Inflation Optionality

Over 50 percent of MasterCard’s revenues are contributed by volume-based pricing. Thus, higher inflation would likely benefit revenue growth.

VocaLink Acquisition

Perlin mentioned that the VocaLink acquisition represented a strategic asset, since it:

• Allows the company to target a wider range of payment flows.
• Enables the company to play a more valuable role in the U.K. payment ecosystem.
• Expands the company’s product offering to its financial and merchant partners globally.

New Innovation

“We believe three major innovation themes (tokenization, push payments, and IoT) will drive incremental secular growth into 2020, which combined could drive $2 billion–$5 billion in incremental revenues,” the analyst commented.

At last check, shares of MasterCard were up 1.6 percent at $107.87.