More on MA

MA Q3 well ahead of expectations, though the company did guide to lower topline for next year below their 12-15% long run goal. However based on the tremendous leverage the company has (76% incremental margins) and variable operating costs (largely advertising and personnel), MA believes it can hit 20-30% EPS growth with high single digit topline (at constant currency, a strong dollar is a negative for the numbers).
Current consensus is at $10.50 which is below 20% growth. Of course consensus is coming down. My realistically pessimistic take on 2009 gives $10.08. This still has 6% topline growth and y/y operating margin expansion (1.5% increase in expenses). Management believes that the company can hold the line on expenses and given its composition I think that is very likely. Even with flat transaction and GDV growth I get EPS above $9.20. There would still be some topline due to pricing and lower rebates as volume targets are not met.
A conservative DCF well below management expectations of margin expansion and topline growth gives $268. Given the lack of visibility, I think the value of the DCF at present is lessened, however it does capture the longer term value of the company. MA is a FCF machine with a very stable franchise, a very good candidate to apply a DCF towards. Of course the DCF does not account for legal, regulatory or some technological shift that would damage the franchise but it is a very good datapoint.
MA currently at $140/share is trading at 14X my 2009E EPS estimate. Can the stock go lower, clearly it can, however I am quite certain the MA will continue to trade at a significant premium to the market. Even after this period of hyper EPS growth subsides (next 3-5 years as company expands margin), MA should still be able to post low double digit EPS growth ( the usual levers, some topline, some margin expansion, and share buybacks). Given the global franchise, the balance sheet strength, the high returns and cash flows, the future MA would still have a 18X multiple similar to over global brand stocks like KO. Currently KO is trading at 13.3X 2009 exactly the same as MA (on $10.50 consensus). MA's growth profile and margin expansion opportunities are significantly greater.