Special Free Report From The Motley Fool
Fellow Fool,
Thank you.
Our week-long grand opening of the Epic Bundle, a brand-new 4-in-1 investing solution, has come to an end, and we appreciate you following along.
You can still upgrade to the Epic Bundle and unlock access to Stock Advisor Canada, Rule Breakers Canada, Dividend Investor Canada, and Everlasting Stocks, tripling your monthly stock picks vs owning just one service and getting instant access to more than 230 active buy recommendations…
…but whether you upgrade or not, we wanted to say thank you for following along this week and for being a member of Motley Fool Canada.
That’s why we wanted to do something special by sharing one stock pick from each of the four services included in the Epic Bundle as a token of our appreciation.
Enjoy!
Your Motley Fool Canada team
Descartes Systems Group (TSX:DSG)
Recommended in Rule Breakers Canada on May 26, 2022
Descartes Systems operates the largest neutral shipping network in the world.
Why Buy
• Descartes’ neutral shipping network connects more 200,000 shippers, manufacturers, retailers, and government agencies to each other to share detailed information about shipments with each other.
• Descartes customer retention rate is consistently around 95%.
• In combination with its network Descartes sells cross-sells software that helps solve customs, routing, tracking, and regulatory compliance issues.
You’ve probably heard there’s just a bit of inflation in the economy at the moment, a shortage of some products from broken and backed up supply chains, geopolitical instability, and a shifting tariffs and regulatory requirements that add further complications to the global economy.
Descartes Systems Group (TSX:DSG) helps companies overcome these challenges by providing tools to locate alternative sources of supply, new logistics partners, and determine different shipping routes. It also helps companies meet regulatory, customs, and tax requirements around the globe.
In fact, these challenges and the everchanging nature of shipping and logistics are positives for Descartes, because they create more customers looking for help to make their supply chains more efficient, and the more manufacturers, shippers, and logistics providers that are a part of Descartes’ network the more valuable the network becomes.
Powerful Network Effects
That network is Descartes Global Logistics Network (GLN) and it is the largest neutral shipping network in the world with more than 200,000 shippers, manufacturers, retailers, distributors, and government entities all connected to each other to share detailed information on shipments in Descartes modular cloud based platform.
This information sharing allows transportation providers, in-house and third-party logistics providers, and end customers to know where their goods are and when they can be expected to arrive so that delivery windows can be set and met even if multiple parties are involved in a transaction.
This is all done using the standard communications format and platform Descartes has developed, so that everyone is effectively speaking the same language and their processes can be automated. The alternative is manual tracking or one-off solutions that need to be built, maintained, and updated as more parties are added to a company’s supply chain.
All this detailed information on shipments means Descartes has a significant amount of data on billions of shipping transactions – roughly 19 billion transactions a year to be exact. Having this data available allows Descartes’ customers to be able to do everything from researching global trade information to booking, tracking, and fulfilling the regulatory requirements for a shipment.
With more than 200,000 parties on Descartes GLN this is a business with true network effects that are difficult to replicate. There is significant value for new customers who join and are immediately able to communicate, establish relationships, and transact. This value only grows as new customers come on board and by the same token customers are unlikely to leave because of the value they get from being on the network, which is why Descartes customer retention rate is consistently around 95%.
Acquiring and Cross Selling
Not every solution a customer might need is provided by Descartes GLN, so Descartes looks to help customers fulfill these needs with modular online and wireless solutions that can be purchased if a customer needs them.
So, while the GLN manages the flow of data and documents that track and control inventory in motion, the software add-ons help with ecommerce shipping and order fulfillment, customs and regulatory compliance needs, and routing and telematics. These solutions are built to work with the Descartes GLN seamlessly, so they can be deployed quickly by customers when needed.
Often these software solutions are acquired by Descartes to help solve a pain point that has been identified by one group of customers and then cross-sold to other customers, too. Over the last decade management has used this strategy to enhance the overall growth of the business. And, as its sales strategy has shifted from a geographical focus to the needs of different industries, Descartes has seen its sales growth accelerate.
Management targets annual EBITDA growth of 10% to 15% with roughly half coming from organic growth and half from acquisitions. Lately this growth has been closer to 20% with more than 10% organic growth as the investment in people and tools have helped Descartes improve its cross-selling efforts.
Risks and When We’d Sell
No investment is without risk. Here are three risks we’re watching for at Descartes Systems:
• Descartes Systems’ business model depends on it making small, bolt-on acquisitions of software and services companies with offerings that compliment its global logistics network. Over the last few years all but one acquisition has been funded from cash flow, only two acquisitions were for more than $100M, and many were for $50M or less. The small size makes these deals easier to integrate, so we’d be concerned if Descartes is over-extending itself operationally and financially if it tried to digest multiple large acquisitions.
• Over the last four years profitability has grown more rapidly than sales as Descartes business begins to gain operating leverage. We think there is more growth ahead, which means we should see margins continue to improve. However, a temporary sales decline would likely be accompanied by lower margins and a volatile share price.
• The global logistics network is what draws customers to Descartes and gives the company the opportunity to sell additional software solutions that integrate with the GLN. It’s a powerful business model and we see no reason customers would leave the GLN. It is possible, however, that better software solutions will come along that replace some of the software add-ons Descartes sells and we’ll be watching for competition on this front.
The Foolish Bottom Line
Despite the size of its network, growing sales and profitability, and growth potential Descartes is still a relatively small company with a market cap of just $6.4 billion. That’s on the borderline between small cap and mid-cap in our book, but we don’t think it will be too many years before demand for Descartes’ GLN and related software solutions becomes considerably larger. So, while it’s firmly a rule breaker now, we won’t be surprised if Descartes network has it making the rules in the future.
Descartes: What Could Go Right (and Wrong)
Descartes Systems faces opportunities as well as challenges.
5 Green Flags
• Expanding EBITDA margin. If we see Descartes’ EBITDA margin grow it is a good sign that its cross-selling efforts are continuing to work well, because each incremental sale of a software add-on comes with little in the way of added costs.
• A growing baseline. In place of guidance management outlines the baseline revenues and adjusted EBITDA expected from contracted and recurring revenues. This is updated each quarter and has been growing each quarter. Sales above this amount in the actual results are new sales that weren’t under contract. We’re looking for sequential growth in the baseline figures and year-over-year growth in actual sales and EBITDA.
• More small acquisitions. Small acquisitions by Descartes are a sign the company is looking to add functionality its customers are requesting. This makes the overall network more valuable to existing customers, more attractive to prospective customers, and creates tomorrow’s cross-selling opportunities.
• Continued financial discipline. Despite the inflationary environment management at Descartes has done an excellent job growing its sales more quickly than its expenses. However, with rising salaries for software developers it wouldn’t surprise us if general and administrative costs began to rise more quickly in the near-term. We wouldn’t consider this a red flag, but continued success on this front is a green one.
• A dividend or share buybacks. Descartes has a net cash position and an unused revolving line of credit ready to tap for acquisitions. As its cash flow continues to grow the initiation of a dividend or opportunistic share buyback program would be a sign that management takes rewarding shareholders and the allocation of its excess cash flow seriously.
3 Red Flags
• A global recession. While upheaval in global supply chains and ever-changing regulatory requirements make Descartes offerings more valuable, it still depends on growing transaction volumes to drive sales growth. In a recession, shipment volumes are likely to shrink, which takes away one of Descartes avenues for growth and makes it likely its growth rate would slow temporarily. Fortunately, it can still grow by bringing new customers into the fold and selling additional software solutions to existing customers.
• A large acquisition. We highlighted this in the risks section, but it bears repeating that Descartes has proven it can make multiple small acquisitions totaling about $100 million a year. If we saw Descartes make one large deal for say over $400 million we’d want to take a close look at management’s plans and the potential benefits and risks of the deal.
• Management turnover. CEO Ed Ryan has been with the company since 2000 and CEO since 2013. The COO and CFO have been in place since 2013 and 2014, respectively. This team has worked together to deliver considerable growth over the years and we think the stability at the top has been beneficial.
Enghouse (TSX:ENGH)
Recommended in Stock Advisor Canada on August 10, 2022
Enghouse provides enterprise software to several industries, primarily focusing on contact centres, telecom and utility networks, and transportation management.
Why Buy:
- It has a proven track record of creating value through acquisitions.
- It has an attractive business model with a healthy balance sheet and steadily increasing dividend.
- It’s operating in fragmented markets with ample room for future growth organically and via acquisitions.
- It’s trading at a significant discount to historical valuations.
Mindset: This Recommendation…
…might be of interest to
- Investors seeking a conservatively run, high-quality company that offers an attractive valuation, reasonable growth prospects, and a steadily increasing dividend payment.
…might not be of interest to
- Aggressive investors that prefer significant organic growth prospects and are willing to stomach the volatility that goes along with a high-risk profile.
- Those that have a short attention span. A “catalyst,” probably by way of acquisition, is likely required for this recommendation to win. Timing, however, is unknowable, if ever.
How to incorporate it into a portfolio:
- Enghouse is meant to provide the potential for growth at a reasonable price in a diversified portfolio as well as contributing on the income front via the dividend.
Introduction
Step into my time machine, fellow Fool, and allow me to set the dial for February 17, 2016.
Can you recall what you were up to that day?
I seem to think taking kids to evening downhill ski lessons at the local hill was part of the mix on this end, but, of course, specifics escape me. Outside of birthdays, anniversaries, or perhaps a meaningful vacation, I suspect most are in this same boat.
We can, however, confirm that it was on this date that Stock Advisor Canada members were first given a heads-up about a relatively small Canadian consolidator of enterprise software companies. Enghouse (TSX:ENGH) appeared for the first and only time in our monthly “Stocks on our Radar” feature, and we concluded that
“…Acquisitions must continue to justify the current valuation, and this tends to be an increasingly risky game the bigger a company becomes. Price can help get past this risk and, in our opinion, we’d like to see this occur before moving forward.”
We’re going to further pick this conclusion apart as we go, but suffice to say, the company’s current valuation is the primary reason Enghouse has landed as this month’s Canadian recommendation. Remarkably, little else has changed from that original profile.
The details, in all their glory, await.
The Business
Founded in 1984, Enghouse specializes in providing enterprise software to a number of industries—primarily centering on contact centres, video communications, remote work, communications for next-generation software defined networks, public safety, and the transit market. The company is organized into two divisions:
Interactive Management Group: This segment provides communications software for areas like customer service and in-house enterprise communication. This software supports a host of different functions designed to facilitate remote work, enhance customer service, increase efficiency, and manage customer communications across the enterprise. Overall, this division makes up about 60% of Enghouse’s total revenue.
Asset Management Group: This division includes software geared toward telecom and utility networks and transportation management. On the networks side of the equation, Enghouse’s software assists enterprises in the planning, design, operation, and support of their networks (everything from revenue and billing management to overseeing the management and build-out of network infrastructure to analytics of the network’s performance).
Aside from the broader trend from on-premise software to cloud-based software subscriptions (commonly referred to as SaaS, or Software as a Service), Enghouse’s management notes there are several tailwinds behind its key markets driving software adoption.
This, Fools, is enterprise software in a nutshell. There is a whole world of software out there that you and I interact with on a daily basis, directly and indirectly, yet have no idea what it’s called or who provides it.
Call and contact centres, for instance, remain an important touch point for enterprises to interact with customers. The rise of mobile devices and apps—and the evolution beyond solely voice interactions with customers—makes the back-end management of contact centres all the more complex. This is where Enghouse’s various software solutions can ease pain points and help enterprises manage customer interactions from all sources and devices.
The opportunity set is large and best of all for Enghouse, this market is very fragmented with more than 400 software vendors—leaving ample room for consolidation and ongoing market share growth.
The Opportunity
Part of the reason Enghouse might sound like a hodgepodge of different software offerings is because much of the company’s growth (and success) over the years has come by consistently acquiring smaller software providers and integrating them under one umbrella. Enghouse has completed 44 acquisitions since 2002, which have helped to expand the company’s revenue more than 27 times from $14 million in FY02 to $467 million in FY21.
In short, Enghouse steadily acquires small software companies—generating between $5 million and $50 million in revenue—that either expand or complement its existing offerings, and/or help the company expand geographically. Enghouse also has an eye for companies that generate recurring revenue, either through maintenance agreements or software subscriptions.
The company funds these acquisitions through cash flows from the existing operations of the business and does not believe in using debt as a financing vehicle. And because of its success implementing this growth-by-acquisition strategy, historically, the market has awarded Enghouse with a premium multiple.
Herein was our primary issue on that original look back in February 2016. At the time, Enghouse was trading for about 45 times trailing earnings. In our opinion, at that level, multiple contraction was a significant risk.
Today, as illustrated by the chart below, Enghouse trades for about 20 times trailing earnings.
Given the context of history, the risk of significant multiple contraction from this point isn’t nearly as daunting.
Question, though … What gives? Why has this former darling fallen from grace?
The following table holds the answer … have a look and take a guess:
Answer: Revenue growth has evaporated.
Bigger answer: Enghouse hasn’t completed a material acquisition since December 2020. This is a growth-by-acquisition story—no growth by acquisition, no story. The narrative disappeared, and the multiple contracted accordingly.
Fair enough. But assuming most of you have been investing over the past couple years, and you’re aware of the valuation extremes that existed, especially when it comes to all things software, there’s reason to believe Enghouse’s management was only being disciplined—something that tends to be a feature of companies that have a founder with a 12% stake in the business at the helm.
From where we sit, it sure looks like the available returns on potential acquisitions simply haven’t been high enough to clear Enghouse’s hurdle. Clearly, the price paid matters to this management team, and there’s a big difference between paying $100 for $10 worth of recurring annual cash flows and $400 ($100 is better).
Now, even if you’ve not been investing for the past few years but have for much of 2022, you’re probably aware of what’s happened to valuations … especially when it comes to all things software! And there are signs that Enghouse could well be loosening the purse strings. An estimated $6 million acquisition was completed in June, and another estimated at $1.4 million was announced in July. That’s far from material but potentially a sign of things to come.
That’s our opportunity. Industry-wide enterprise software valuations could find a level that, once again, makes the returns available acceptable for Enghouse. If growth by acquisition resumes, we could get an improved multiple along with a juicier stream of earnings and free cash flow.
Goodness knows the company is well prepared financially for this scenario to play out.
There’s over $200 million net cash in the bank, and the business as is generates >$100 million in free cash flow annually. And while we wait, there’s a more than covered 2.2% dividend yield with a payout that grows annually to see us through.
Risks and Considerations
To be clear, we need something to happen here. That is, Enghouse can’t just go about its life as is for us to have a winner on our hands. Management action is required for the upside scenario we envision.
This said, significant downside if the status quo remains isn’t obvious. Revenue growth has gone single-digit negative mostly because 2020 had an outsized surge. However, it’s not as if the business has gone sour. Therefore, we’re still looking at something north of $100 million in free cash flow annually and provided that remains, combined with an already beaten-down multiple, we’re nicely insulated.
Our biggest risk then boils down to impatience. We are willing to sit and wait for Enghouse to do something for an unknowable amount of time in order to profit from this recommendation. Are you?
Foolish Bottom Line
Enghouse won’t be the flashiest company on the Stock Advisor Canada Scorecard, but the formula here isn’t nearly as broken as the market currently thinks. Don’t shy away from a quality business that we think remains a powerful compounder for patient shareholders.
Primaris REIT (TSX:PMZ.UN)
Recommended in Dividend Investor Canada on July 21, 2022
Primaris REIT (TSX:PMZ.UN) has a strong balance sheet and is looking at putting undeveloped and underused land to better use.
Why Buy:
- It has a strong balance sheet with improving cash flow from higher occupancy.
- It’s unused or underused land offers redevelopment opportunities across multiple properties.
- It’s trading at a significant discount to NAV and tangible book value.
Points to Consider…
- Primaris REIT’s quarterly dividend is not eligible for the federal Dividend Tax Credit if this Canadian dividend payer is held in a taxable, non-registered account.
- The REIT does not offer a dividend-reinvestment plan, but your brokerage may. Contact your brokerage for more details.
The information regarding tax treatment in this piece is informational only and not intended as tax advice. For information on your individual tax situation and how it could be affected by dividends, please consult your tax advisor.
Over the last couple of decades there have been a few hidden asset, real estate plays that have grabbed the attention of investors. Sears Holdings, which ultimately filed for bankruptcy, is probably the poster child for this investment thesis.
All of these hidden asset ideas had what I’ll politely call problems. Sometimes it was too much debt or a dying business—often a retail business—that wasn’t generating enough cash flow. In some situations, such as Sears Holdings, it was both.
These are big problems for a hidden asset thesis because real estate is an illiquid asset, and large portfolios of real estate don’t change overnight. Even if the properties are simply being sold and the buyer redevelops them, there are only so many buyers who can see the potential in transforming all or part of a retail asset into something entirely new.
My recommendation this month is looking at enhancing the value of its real estate assets. The good news is that the value isn’t considered hidden at all. Primaris REIT (TSX:PMZ.UN) has always operated malls and is a well-known commodity in the investing community. It has a strong balance sheet and is looking at putting undeveloped and underused land to better use, and it’s not counting on selling large swaths of its real estate to create value. And since it was spun off from H&R REIT (TSX:HR.UN) into a difficult market, I think we’re getting an opportunity we might not get otherwise.
The Business
Primaris is Canada’s only REIT focused on enclosed shopping centres and the third-largest owner and operator of enclosed malls. I’m not including these factoids to make Primaris sound more attractive. I’m aware of which decade we’re living in and the struggles of the average mall. Think of this as a frame of reference for what Primaris is today.
Primaris was independent until 2013 and is now independent again at the start of 2022 following H&R REIT spinning out Primaris with 27 mall properties. Concurrent with the spinoff, the Healthcare of Ontario Pension Plan (HOOPP) sold Primaris eight more properties for a total of $800 million. The purchase was funded primarily with equity and made HOOPP the largest shareholder with a 26% ownership stake, while giving Primaris a total of 35 shopping centres.
The top five tenants are a stable base of Canadian Tire, Walmart, Loblaw, TJX, and Bell. They contribute 19.8% of total rent, and all have investment-grade credit ratings. Once you get outside of the top six, no tenant contributes more than 1.8% of revenue, which gives Primaris a diverse set of tenants and helps lower its risk somewhat.
Of course, some of these malls are still very good properties and they should continue to do well, while some will likely be redeveloped into open air shopping centres that are more popular with shoppers and offer more flexibility. Still, Primaris is in very good shape coming out of the pandemic with its 27 legacy properties having an occupancy rate over 90%, and it is rapidly moving the eight recently acquired properties up to this level, too.
Why it’s Time to Buy Primaris REIT
Primaris has posted solid results in its two quarters since being spun out of H&R REIT. In the just completed first quarter, it saw the net operating income at properties it has owned for more than one year increase by 8.2%.
That’s the type of bounce we want to see coming out of the pandemic, but what I like most is that the opportunity for Primaris goes beyond increasing rents and leasing open space. At nine of Primaris’s properties, the current sites only cover only 22-42% of the available land. Each of these locations is also near a transit terminal or stop, which means they have consistent traffic passing by them every day and makes them candidates for potential residential and mixed-use development.
The first property Primaris is expanding—what it calls “intensifying”—is Dufferin Mall in Toronto, where the plan is to replace surface parking spread across two blocks with three residential buildings containing 1200 rental units. This makes the land more productive and should make the retail space more attractive, too.
Another attractive aspect of this strategy is that Primaris can choose to do the development itself, go with a partner in development, or sell the land to a buyer with a similar mindset. The latter strategy could be attractive in situations where Primaris doesn’t want to take on additional debt but does want to see the benefits of developing the unused space.
There is a solid argument that following a recovery from the pandemic, online sales are still going to eat away at brick-and-mortar retail sales. That’s why Primaris’s strategy to optimize its properties is so important. Perhaps equally important is that with a debt-to-total assets ratio of just 28%, Primaris has the balance sheet strength to pick and choose which properties to focus on first. That means it can choose to execute on properties that deliver the best returns and match up with its capabilities, while partnering where it needs help, because it wants to and not because it has no choice.
Management is also using its balance sheet strength to spread out the maturity profile of its remaining debt and to replace some of the secured debt it has with lower rate unsecured debt. Yes, you read that correctly. Even with the recent rate hikes and tightness in the lending market, Primaris is lowering the cost of its debt. This is exactly the type of optimization you want to see from a management team that can focus exclusively on its assets following a spinoff.
Management seems to agree that Primaris is an attractive investment opportunity now, too. Over the past six months, the CEO, CFO, and multiple directors have purchased shares in the open market at prices in the $12.50-$14.50 range. The company is using its cash flow to repurchase shares, too. In the first quarter, it bought back 0.6% of its outstanding shares at $14.80 a share. With the share price consistently below $13 of late, I suspect those buys have continued.
Finally, we have a share price of $12.45 and a net asset value (NAV) of $22.05 a share. I don’t get too excited about a discount to net asset value, because NAVs fall when property values fall, and properties are marked to market each year. So, I still think the insider buying, the strong cash flow, 6.6% dividend yield, and the likely changes to improve property values going forward matter more, but the discount to net asset value is further confirmation of the value management sees.
The Dividend
Primaris is targeting a payout of 45-50% of funds from operations (FFO) to start. At the time, it was spun off the payout ratio was 52%. We’ve since seen FFO improve, and it’s now possible we’ll see a dividend boost by the end of the year. Whether that increase is a small one (closer to a 45% payout ratio) likely depends on how the evolution of the property portfolio is going and how aggressive management has been with share repurchases.
Like many of our Dividend Investor recommendations, Primaris pays its dividend monthly. We like it when companies do this, because it provides a steady stream of cash that’s welcome in any environment, but especially in a falling market where we’re looking to put cash to work quickly.
Risks and Considerations
Management has indicated that they’re willing consider acquisitions in the enclosed mall space. As a large, focused, publicly traded operator specializing in the sector, they believe they are seen as an attractive buyer. Of course, acquisitions always add risk to the equation, so this is something we’ll want to watch closely. That said, it would most likely be positive if Primaris is able to pick up properties near transportation centres with space for mixed-use development a cash-strapped owner couldn’t pursue.
We touched on this a little bit, but the long-term trend of online shopping puts brick-and-mortar stores on the defensive. Building these properties out with residential development and a greater mix of restaurants and services is a great way to make the retail space more resilient and valuable. But Primaris will still need to execute on its plans by adding attractive residential offerings and bring in the right mix of tenants.
The Foolish Bottom Line
As a recent spinoff with significant development potential in its portfolio there is a lot for investors to take in when looking at Primaris for the first time. Fears of an imminent recession give investors another reason to look elsewhere and avoid a business tied to retail, too.
When I look through the short-term risks and at the fundamental health of the business, I see a company that is set up to succeed with a strong balance sheet and a mixed-use development strategy that has proven successful in multiple markets around the world. If it weren’t an under-the-radar spinoff happening in a challenging economy, I doubt we’d get the opportunity to snatch up a 6.6% dividend yield with an opportunity to grow.
MasterCard (NYSE:MA)
Recommended in Everlasting Stocks on August 18, 2022
Key Takeaways
• Mastercard has regained its upward momentum, having overcome the disruptions at the beginning of the COVID-19 pandemic and taken advantage of new growth in electronic payments and e-commerce activity.
• Mastercard’s global reach has the capacity to foster further acceleration in revenue gains and offers a competitive advantage even against some of its largest rivals.
• Despite having some exposure to a prospective economic recession, Mastercard has far less direct exposure to consumers than do the financial institutions that issue its cards.
Why We Like It
Mastercard (NYSE:MA) is one of the world’s largest electronic payment networks, with users holding nearly 3 billion credit and debit cards and spending an annualized $8 trillion in more than 120 billion transactions every year. After having experienced a short-term dip in sales and profits at the beginning of the COVID-19 pandemic, Mastercard is back on track for growth, having seen revenue rise more than 20% year over year, with even larger gains in net income. As the world continues to make the transition away from cash transactions to digital payments, Mastercard has put itself in the best position possible to take full advantage and claim its share of this lucrative industry.
You Might Like This If…
You want to invest in companies that will prosper from long-term economic growth trends without taking massive hits during downturns. Mastercard’s stock has been resilient in large part because of the ever-present need to conduct financial transactions and its strong business model, which avoids taking on credit risk and leaves the company with reliable streams of revenue and earnings.
The Company Story
Running a global electronic payments network by taking a few pennies from every dollar that moves across your platform might sound like a tough way to make money. But Mastercard has executed its business model to perfection, and with payment volumes approaching the $700 billion mark each month, the fraction of a percent that the company takes produces a current annual run rate of nearly $22 billion in revenue and $10 billion in profit.
Mastercard has consistently grown ever since its initial public offering in the mid-2000s, but the COVID-19 pandemic did present a challenge to its ongoing growth. Yet after taking a hit in 2020, Mastercard returned to record levels of sales and profits in 2021, and it’s on track to reach new heights in 2022. That growth has come despite fresh obstacles to expansion, including the cessation of its business in Russia in the wake of the invasion of Ukraine.
The global economy has largely reopened, and Mastercard has recently started getting a boost from rising cross-border volume that was sluggish in the initial years of the pandemic. The company has recognized the potential impact of inflationary pressures worldwide, and even though it hasn’t seen a marked impact on consumer spending yet, Mastercard’s leadership has its eye on the situation. With built-in diversification in its business model and a lack of credit risk because of its partnerships with card-issuing financial institutions, the electronic payment network provider believes it can sustain its profitability throughout every phase of the business cycle.
Mastercard stock has held its own in the recent downturn, and it’s just 11% below its all-time highs. Yet with plenty of growth ahead of it, we think Mastercard’s business provides a great combination of stability and promise that makes the stock a smart investment in today’s uncertain times.
Management/Leadership
CEO Michael Miebach took over from longtime predecessor Ajay Banga at the beginning of 2021, and he has done a great job of working his way through the business challenges that the pandemic created for Mastercard. Miebach’s history as Mastercard’s chief product officer gives him the experience needed to keep pushing the company forward in global payments and banking. And he has retained the confidence of employees, earning 4.3 stars out of 5 and a 94% approval rating for his work as CEO, according to Glassdoor. The chief executive’s holdings in Mastercard stock are relatively modest, but his compensation is tied directly to the interests of shareholders.