Mastercard Incorporated (NYSE:MA) shares are up more than 37.36% this year and recently increased 0.44% or $0.62 to settle at $141.82. Total System Services, Inc. (NYSE:TSS), on the other hand, is up 33.71% year to date as of 10/02/2017. It currently trades at $65.56 and has returned -0.12% during the past week.
Mastercard Incorporated (NYSE:MA) and Total System Services, Inc. (NYSE:TSS) are the two most active stocks in the Credit Services industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect MA to grow earnings at a 16.77% annual rate over the next 5 years. Comparatively, TSS is expected to grow at a 11.31% annual rate. All else equal, MA’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Mastercard Incorporated (MA) has an EBITDA margin of 55.6%, compared to an EBITDA margin of 19.98% for Total System Services, Inc. (TSS). This suggests that MA underlying business is more profitable. MA’s ROI is 38.50% while TSS has a ROI of 7.50%. The interpretation is that MA’s business generates a higher return on investment than TSS’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. MA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.94. Comparatively, TSS’s free cash flow per share was +0.58. On a percent-of-sales basis, MA’s free cash flow was 9.29% while TSS converted 2.56% of its revenues into cash flow. This means that, for a given level of sales, MA is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. MA has a current ratio of 1.70 compared to 1.10 for TSS. This means that MA can more easily cover its most immediate liabilities over the next twelve months. MA’s debt-to-equity ratio is 0.91 versus a D/E of 1.39 for TSS. TSS is therefore the more solvent of the two companies, and has lower financial risk.
MA trades at a forward P/E of 27.02, a P/B of 25.93, and a P/S of 13.13, compared to a forward P/E of 18.24, a P/B of 5.32, and a P/S of 2.56 for TSS. MA is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. MA is currently priced at a -3.8% to its one-year price target of $147.42. Comparatively, TSS is -4.46% relative to its price target of $68.62. This suggests that TSS is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.90 for MA and 2.30 for TSS, which implies that analysts are more bullish on the outlook for TSS.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. MA has a beta of 1.18 and TSS’s beta is 1.14. TSS’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. MA has a short ratio of 3.25 compared to a short interest of 1.27 for TSS. This implies that the market is currently less bearish on the outlook for TSS.
Mastercard Incorporated (NYSE:MA) beats Total System Services, Inc. (NYSE:TSS) on a total of 8 of the 14 factors compared between the two stocks. MA is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk.