Credit use increases amid inflation. Should you buy Mastercard shares? (NYSE: MA)

Credit card usage remains robust, recording significant growth amid high inflation. Rising prices for goods and services have led credit card balances to rapidly approach pre-pandemic levels. This is good news for credit card companies like Mastercard (NYSE: MA). Given favorable long-term secular spending trends combined with rising revenues and margins as well as attractive free cash flow, I think Mastercard’s growth potential provides a good reason to buy the stock. .

Credit card balances see fastest growth in 20 years

Credit card spending is experiencing a major recovery, unlike the sharp declines seen during the pandemic years. A report released by the Federal Reserve Bank of New York earlier this week highlighted that credit card balances marked the largest increase in the past two decades. Credit card balances in the United States increased 15% year over year in the third quarter of 2022.

Is it just the use of credit cards that is increasing? Let’s look at the overall debt situation in the United States During the quarter ended September 30, total household debt recorded its strongest sequential growth of 2.2% since 2007.

On an annual basis, total household debt rose 8.3% to a record $16.5 trillion. These include an increase of more than 16% from pre-pandemic levels at the end of 2019. Leading the growth figures was a strong growth rate of 15% in card balances credit, followed by a 9% increase in mortgage balances and a 5.5% increase in auto loan balances. On the other hand, a slight decline was observed in student loan balances.

It is important to note here that, despite higher loan balances, new mortgages and auto loans declined in the third quarter due to rising interest rates. Nonetheless, credit card spending remained robust, with overall credit card account limits increasing by $82 billion.

Source: Federal Reserve Bank of New York

One of the concerns that arises from the increased use of credit cards is the potentially higher delinquency rate, which means late monthly payments. It should be noted that delinquency rates hovered around historically low levels during the pandemic years. The saving grace is that even though delinquency rates are rising, they still remain well below their historic highs.

During the third quarter, the US credit card delinquency rate rose about half a percentage point to 3.69% from 3.24% in the year-ago quarter.

Mastercard emerges as a clear winner

Stronger demand for credit cards amid rising prices bodes well for Mastercard as customers continue to seek out new credit products and the offers that come with them. It’s no surprise that during the third quarter, the total number of Mastercard and Maestro-branded cards grew 5.4% year-over-year to 3.05 billion.

On October 27, MasterCard announced positive third-quarter results, driven by robust consumer spending, helped by a recovery in cross-border travel. Adjusted earnings of $2.68 per share significantly beat analysts’ estimates of $2.58. Additionally, the figure was 13.1% higher than last year’s figure of $2.37 per share.

Additionally, revenue jumped 15.5% year over year to $5.76 billion. Revenue was driven by 11% year-over-year growth in gross dollar volume to $2.1 trillion, strong cross-border volume growth of 44% and 9% growth in switched transactions.

What was more impressive was its profit margin. MA posted an adjusted operating margin in the third quarter that increased by 100 basis points to 57.7%, compared to 56.7% in the same period of the previous year.

Mastercard CEO Michael Miebach said, “We will continue to monitor impacts related to high inflation and other macroeconomic and geopolitical risks. Our diversified business model and our ability to modulate expenses puts us in a good position to weather periods of uncertainty while remaining focused on our strategic objectives.

Turning to next week’s Black Friday, U.S. non-auto retail sales are expected to increase more than 15% year-over-year, according to Mastercard SpendingPulse. The forecast takes into account all in-store and online retail sales for all payment methods.

In terms of valuation, Mastercard is trading at a discount to its own historical five-year P/E averages. Currently, Mastercard is trading at a P/E ratio of 34.2x, reflecting a 17% discount from its five-year average of 41x.

Is Mastercard a buy or a sell, analysts say?

The Wall Street community is clearly bullish on Mastercard stock. Overall, the stock commands a strong buy consensus rating based on 18 unanimous buys. Mastercard’s average price target of $395.94 implies upside potential of 15.2% from current levels.

Takeaway: Consider buying Mastercard stock

Hit hard by rising inflation, more and more American consumers are resorting to increased use of credit cards. In the current scenario, Mastercard is expected to perform well if the world enters a recession, similar to its strong growth seen in previous recessionary periods.

Despite the headwinds of the Russian-Ukrainian war and currency fluctuations, the company was able to deliver impressive third quarter results. Additionally, the increased revenue translated into a higher margin, which is commendable given the higher costs in the current inflationary environment.

Given robust spending trends driving higher revenue and profitability along with long-term growth potential, I’m bullish on the stock.


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