Question:
I have owned MasterCard Inc. for about a year now. With the upcoming regulation issues, do you have any thoughts on if I should sell or hold?
Answer:
MasterCard Inc. (NYSE: MA) is a stock we own in our portfolio. MasterCard is a payment solutions company that provides a variety of services in support of the credit, debit and related payment programs. Like many other bank card issuers, MasterCard may be affected by the Durbin Amendment, which was passed into law as part of the Financial Regulation. The law includes regulations of debit interchange fees collected by bank issuers and set by card networks such as MasterCard and Visa Inc. (NYSE: V). Directly affecting the card networks are provisions that prevent the networks from specifying that their branded debit cards can only be used on their corresponding network.
While these rules may have about a $10 billion effect on card issuers, we do not think it will change MasterCard’s business model. We feel this overplayed in the media, and that MasterCard will still be able to grow their business. MasterCard also has more room for growth compared to their competitor Visa. The company also has a solid presence in Asia and Europe, so they will likely benefit from growth in those countries.
The stock trades at a Price-to-Earnings-to-Growth ratio of less than one. So while the company has a price-to-earnings ratio of 18.2, the company is expected to grow at about 20%. The stock is a little more volatile than some others we recommend. It has a dividend yield of 0.24%. The company is listed in the Technology sector, as it is considered a data processing and outsourced services company. If you own MasterCard stock, we would suggest holding it.
Could you give me three stocks you feel are undervalued in today’s market?
We would suggest UnitedHealth Group Inc. (NYSE: UNH), Aflac, Inc. (NYSE: AFL), and Archer Daniels Midland Company (NYSE: ADM).
United Health Care is the largest HMO with more than 70 million clients. Even with the Health Care Reform bill, we believe UNH will likely experience increased coverage and expand their client base more than 50%, even if it is a lower margin business. The company has expected growth of 11% over the next three to five years with the health care bill. The stock is trading at more than a 30% discount to its five-year averages for price-to-earnings.
Aflac is the king of supplemental insurance, mostly in Japan, but sees the fragmented U.S. market as a center of future growth. Most Aflac policies are individually underwritten and marketed at work sites through independent agents, with premiums paid by the employee. The company offers a diverse product suite, also selling Medicare supplement, accident, and long-term convalescent care policies. The company has a low debt at 25% of total capital, and any capital issues that hurt the stock during the financial crisis are a nonissue now as the company has been vigilant in writing off and selling bad debt. We expect future growth in price to come from performance of underlying businesses instead of revaluation of their fixed income portfolio.
We like Archer Daniels Midland because food and agriculture is one area where The United States still has competitive and comparative advantage.
ADM is the world’s leader in agricultural processing, and believe the company will benefit immensely from food price inflation. Farmable land is shrinking outside of the United States and we see the next world race will be for food. We think the company hedges well without much speculation, and it currently sells for more than a 30% discount to its five-year averages for price-to-earnings, price-to-free-cash-flow and at a huge discount to its industry.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
