Mastercard (MA) has made over $7 billion in adjusted free cash flow (FCF) so far this year based on its Q3 earnings. This huge FCF represents 38% of its YTD revenue and 45.9% of its quarterly sales.
As a result, using analysts' 2024 sales forecasts MA stock could be worth 35% more. That means it could be worth up to $550 per share by the end of next year.
As of early trading on Tuesday, Nov. 21, MA was at $407.71 per share. It has risen over 11% since Oct. 26 when earnings were released and MA stock was at $364.69.
I discussed Mastercard's impressive earnings and FCF in my Oct. 31 Barchart article, “Mastercard's Free Cash Flow Excites Investors as it Finance Huge Buybacks.” We can use info in that article to estimate its fundamental value.
Valuing MA Stock Using Its FCF Margins
For example, I showed in the article that Mastercard's YTD FCF margin was 37.9% (i.e., $7.03 in adj. FCF divided by $18.55 billion in sales). But looking more closely at the company's financials shows that its recent quarterly FCF margins were much higher.
For example, based on Seeking Alpha's quarterly FCF data, one can see that the company made $3.233 billion in Q3 cash flow from operations (CFFO). So, after deducting $104 million in capex and $130 million in capitalized software spending, its adjusted FCF in Q3 was $2.999 billion.
But here is the amazing point. That represents a huge 45.9% of its $5.533 billion in Q3 sales. That is much higher than its YTD 37.9% FCF margin. In other words, we can use that higher margin going forward to estimate its future adj. FCF.
For example, 33 analysts surveyed by Seeking Alpha show that their average sales forecast for 2024 is $28.08 billion. So, if we apply this 45.9% adj. FCF margin, Mastercard could generate $12.88 billion in adj. FCF next year.
We can use that figure to estimate the value of MA stock.
What MA Stock Could Be Worth Using Adj. FCF
For example, if we apply a 2.5% FCF yield to this adj. FCF estimate, we can derive its future market cap valuation. So dividing $12.88 by 2.5% (which is the same as multiplying it by 40x), we get a market cap estimate of $515 billion.
Today, Mastercard's market valuation is $382 billion. In other words, this implies that MA stock could rise by 34.9% over today's market cap. That implies that MA stock could rise by 35% to $550 per share, up from today's price of $407.71. This could take up to a year once analysts start to incorporate higher adj. FCF estimates in their price targets.
Moreover, as I pointed out in my last article, the company is doing large share buybacks. For example, on an annualized basis shareholders could expect $9.6 billion in buybacks over the next year. That represents 2.4% of its present market cap.
In other words, its target price could be even higher than $550 per share based on its buyback program. The bottom line is that investors can expect to see a much higher stock price over the next year.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
