“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, September 09, 2019

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

ALSO

"Trading Capital Management"



Option Trade – Mastercard Inc (NYSE: MA) Calls

Thursday, September 12, 2019

** OPTION TRADE: Buy the MA NOV 15 280.000 CALL at approximately $7.00.

Place a high pre-determined sell at $14.00.

Include a protective stop loss of $2.80.

Mastercard Inc (NYSE: MA) stock is up 286% in five years. In the last week, prior to yesterday, the share price is up 3.6%.

And, shares of Mastercard have increased +51.6% year to date, outperforming the Financial Transaction Services industry’s rally of +44.2%.

Mastercard managed to grow its earnings per share at 19% a year. This EPS growth is lower than the 31% average annual increase in the share price. This suggests that market participants hold the company in higher regard, these days. That's not necessarily surprising considering the five-year track record of earnings growth.

Numerous acquisitions made over the past many years have fueled its inorganic growth. The company's solid market position, ongoing expansion, investment in technology and opportunities from the shift toward electronic payments, paves path for long term growth. Its solid capital position enables investment in business.

Past Earnings…..

Mastercard last released its quarterly earnings data on Tuesday, July 30th.

The credit services provider reported $1.89 earnings per share for the quarter, beating analysts’ consensus estimates of $1.82 by $0.07. Mastercard had a net margin of 42.71% and a return on equity of 135.02%.

The firm had revenue of $4.11 billion for the quarter, compared to analyst estimates of $4.08 billion. During the same period last year, the firm earned $1.66 earnings per share. The business’s quarterly revenue was up 12.2% compared to the same quarter last year. On average, analysts expect that Mastercard will post 7.61 EPS for the current year.

Future Earnings…..

Mastercard is scheduled to announce its next earnings results on Tuesday, October 29th.

Wall Street analysts predict that Mastercard will post earnings per share (EPS) of $2.01 for the current quarter, according to Zacks. Twelve analysts have issued estimates for Mastercard’s earnings. The lowest EPS estimate is $1.94 and the highest is $2.06. Mastercard reported earnings of $1.78 per share in the same quarter last year, which would indicate a positive year over year growth rate of 12.9%.

Positive factors…..

Analysts think the company's revenues are gaining from higher switched transactions, increase in cross-border volume and gross dollar volume.

Mastercard has built a strong ecosystem with a wide payment processing network across the world along with sturdy brand value and consistent investment in technology to stay ahead of the changing markets.

Mastercard’s fixed cost of establishing processing networks has helped to reap operating leverage, which has aided its margins.

The company has complemented its core growth with numerous small and big acquisitions. These buyouts have been accretive to its revenues and have allowed it to grow faster in scale and size to compete with other players in the industry.

Mastercard has been able to maintain its superior operating performance over the years with revenue CAGR of 13% from 2013-2018, which was up further 15% in the first half of 2019. The top-line growth was fueled by an increase in switched transactions (the number of times a Mastercard account is used to facilitate a purchase), gross dollar volume and the total dollar amount of all transactions across Mastercard's network.

The company’s Service business provides solid revenue diversification, beyond its core payment processing business.  This business offers services like fraud detection, reward program management, consulting, and data analytics to merchants and financial institutions.

Recent acquisitions made by the company also reinforce investors’ confidence. The buyout of Transactis, a bill payment platform will streamline bill presentment and payments.  It also acquired Transfast, which allows Mastercard to disperse payments across bank accounts, mobile wallets and cards, all through a single API.

“We are driving growth in our core products with key wins around the globe, and our recent acquisitions, such as Transfast, and new partnerships, like P27 in the Nordics, will help us address our customers’ evolving payments needs, particularly in the areas of real-time account-to-account and cross-border payments,” CEO Ajay Banga stated.

The cashless payments company stands to benefit from the shift towards digitized money. In July, MA announced that it’s partnering with Evolve Bank & Trust to create a frictionless payment system where employers can pay gig workers with an interest-free loan for service in almost real-time.

The company is currently trading at a forward 12-month price-to-earnings ratio of 33.5 compared with the industry’s P/E of 27.26. It commands a premium valuation because of its solid performance and a promising business model. For the current year, Mastercard expects earnings to grow by 17.3% compared with the industry’s growth of 9.4%.

Also, disciplined capital management by way of share buybacks and divided payments is commendable.

Analysts…..

Mastercard had its target price increased by equities researchers at Citigroup from $288.00 to $317.00 in a research note issued on Monday. The brokerage currently has a “buy” rating on the credit services provider’s stock. Citigroup‘s price objective would suggest a potential upside of 8.79% from the company’s previous close.

Goldman Sachs’ James Schneider believes MasterCard is on track to see even more growth on top of the 50+% year-to-date gain it has already achieved. Despite the fact that its $284 billion market cap falls below Visa’s (V) $401 billion, Schneider argues that MA has a lot going for it.

As a result, the five-star analyst reiterated his Buy rating on September 3.

The rest of the Street is on the same page. With 15 Buy ratings vs 1 Hold received in the last three months, the consensus among analysts is that MA is a ‘Strong Buy’. Its $310 average price target suggests 11% upside potential.

Several other equities analysts have recently commented on the company…..

  • Mastercard received a $292.00 price target from equities research analysts at Credit Suisse Group in a research report issued on Tuesday. The firm currently has a “buy” rating on the credit services provider’s stock. Credit Suisse Group’s target price would suggest a potential upside of 8.17% from the company’s previous close.
  • Tigress Financial reaffirmed their buy rating on shares of Mastercard in a research report published on Thursday, August 22nd.
  • Mastercard received a $315.00 target price from stock analysts at Royal Bank of Canada in a note issued to investors on Wednesday, August 7th. The brokerage presently has a “buy” rating on the credit services provider’s stock. Royal Bank of Canada’s price target would suggest a potential upside of 11.95% from the stock’s current price.
  • Mastercard had its price target upped by analysts at Barclays from $310.00 to $319.00 in a research report issued on Monday, August 5th. The brokerage currently has an “overweight” rating on the credit services provider’s stock. Barclays‘s price objective would indicate a potential upside of 13.37% from the company’s current price.
  • Mastercard received a $328.00 price objective from equities researchers at BMO Capital Markets in a research note issued to investors on Wednesday, July 31st. The brokerage presently has a “buy” rating on the credit services provider’s stock. BMO Capital Markets’ target price suggests a potential upside of 20.64% from the stock’s current price.

Insider Buying…..

Mastercard Director Richard K. Davis acquired 1,735 shares of Mastercard stock in a transaction that occurred on Monday, August 12th. The stock was bought at an average price of $270.09 per share, for a total transaction of $468,606.15. Following the completion of the acquisition, the director now owns 6,031 shares in the company, valued at approximately $1,628,912.79.

Mastercard Director Lance Darrell Gordon Uggla bought 1,500 shares of the stock in a transaction that occurred on Thursday, August 1st. The shares were acquired at an average cost of $275.71 per share, with a total value of $413,565.00. Following the completion of the purchase, the director now owns 3,691 shares in the company, valued at approximately $1,017,645.61.

Summary…..

Mastercard’s fifty day moving average is $276.96 and its 200 day moving average is $255.88. Mastercard has a 12-month low of $171.89 and a 12-month high of $293.69. The company has a quick ratio of 1.49, a current ratio of 1.49 and a debt-to-equity ratio of 1.55. The stock has a market cap of $277.76 billion, a P/E ratio of 41.59, a P/E/G ratio of 2.23 and a beta of 1.08.


Option Trade – Microsoft Corporation (NASDAQ:MSFT) Calls

Tuesday, September 10, 2019

** OPTION TRADE: Buy the MSFT JAN 17 2020 140.000 CALL at approximately $6.50.

Place a high pre-determined sell at $13.00.

Include a protective stop loss of $2.60.

Microsoft Corporation (NASDAQ:MSFT), the tech titan, has seen its shares gain +29.4% in the past year, outperforming the S&P 500’s’ gain of +2.4% during the same period. Microsoft is benefiting from growing user base of its different applications like Office 365 commercial, Dynamics, Outlook mobile and Teams. As well, Azure’s expanding customer base is a key catalyst.

Since 2011, the stock has soared 425% and now commands a premium valuation of 26 times forward earnings estimates. CEO Satya Nadella, who took over in 2014, has turned Microsoft into a great growth stock again by steering the company toward the massive opportunity of cloud computing services. Despite the rapid rise in the shares, the stock is still a buy because revenue and earnings grew at double-digit rates in fiscal 2019 (which ended in June), and there's still a tremendous opportunity for Microsoft to benefit from the rapid of adoption of cloud services.

Past Earnings…..

In the fourth quarter, revenue from the commercial cloud business surged 39% year over year and reached $38 billion for the year, which is 30% of total revenue. Microsoft signed several multimillion-dollar cloud agreements, particularly with respect to its fast-growing Azure enterprise cloud service. Revenue from Azure increased 64% year over year in the fourth quarter, which is a slight deceleration from previous quarters but still a terrific growth rate.

Future Earnings…..

Microsoft is expected to report its next quarterly earnings results on Wednesday, October 23rd.

Equities analysts expect Microsoft to post earnings per share of $1.24 for the current fiscal quarter. Eleven analysts have provided estimates for Microsoft’s earnings, with the highest EPS estimate coming in at $1.32 and the lowest estimate coming in at $1.19. Microsoft posted earnings of $1.14 per share during the same quarter last year, which would indicate a positive year-over-year growth rate of 8.8%.

Positive factors…..

The cloud is benefiting the company on the consumer side, too, with growth in subscriptions for Office 365. Additionally, Microsoft is making a significant investment in Project xCloud -- a video game streaming service, where cloud gaming is expected to revolutionize how gamers play over the next decade. There are many other ways Microsoft is leveraging its capabilities in the cloud to drive growth, including Internet of Things.

Microsoft's network effect advantage with its Windows services, combined with its growing clout in cloud services, puts the company in a very powerful competitive position. Investments in high-growth areas, such as cloud, artificial intelligence, GitHub, business applications, LinkedIn, and other areas will cause higher operating expenses in the short term, but management still expects to deliver double-digit operating income growth in fiscal 2020.

Microsoft’s gaming segment is performing well, primarily driven by a combination of Xbox Live, Game Pass subscriptions and Mixer, which are driving user engagement.

Further, acquisitions like PlayFab and GitHub expand Microsoft’s total addressable market (TAM) and penetration. Additionally, expanding partner base is notable.

Also, with Azure growing fast and becoming a greater driver of Microsoft's profits, fiscal 2020 looks poised to be a great year for the software giant.

Moving forward…..

Analysts expect revenue and earnings to grow by 11% and 10%, respectively, in the next year. Regardless of what happens with the trade war or other economic issues in the short term, Microsoft has enough growth opportunities to power your returns over the next decade and beyond.

According to Gartner, the market research firm, the worldwide public cloud services market is forecasted to hit $214.3 billion this year, 17.5% higher than the $182.4 billion seen last year. Cloud system infrastructure services, is expected to enjoy growth of 27.5% in 2019, reaching $38.9 billion.

That bodes well for Microsoft. While Amazon is still the leading cloud service provider with 31.5% market share in cloud infrastructure services, Microsoft is seeing the fastest growth in that segment of the market, growing 63.6% during the second quarter. Overall, total cloud revenue for its fiscal fourth quarter ended June 30 was $33.7 billion, up 12% on a year-over-year basis.

Analysts…..

Microsoft's strong showing in the cloud market hasn't been lost on investors and Wall Street, which have been sending the stock higher over the past few years. When Microsoft reported its fiscal fourth-quarter results the stock surged in after-hours trading.

Some Wall Street analysts are betting Microsoft will eventually surpass Amazon, to become the leader.

Microsoft stock could hit $160 within 12 months -- at least according to Wedbush Securities analyst Daniel Ives. The analyst reaffirmed his $160 price target and an outperform rating for the stock, representing 15% upside. This would notably come on top of a 25% gain for the tech stock over the last twelve months.

Ives' bullishness for the stock focuses on the potential of the company's cloud computing business.

Ives wrote: "We are bullish on MSFT over the next year given our thesis that Azure's cloud momentum is still in its early days of playing out within the company's massive installed base." Ives also estimated that corporate technology workloads in the cloud will increase from 32% today to 55% in 2020, benefiting Microsoft.

Also, Microsoft‘s stock had its “buy” rating reaffirmed by investment analysts at KeyCorp in a research report issued on Thursday, August 29th. They currently have a $155.00 target price on the software giant’s stock. KeyCorp’s price objective would indicate a potential upside of 11.43% from the company’s current price.

The analysts wrote, “We view some of these broader government modernization plans and cloud initiatives as another growth vector for Microsoft’s commercial cloud segment ($38B run-rate growing 43% y/ y) and reiterate our Overweight rating on MSFT.”

As well, Microsoft has been assigned a $155.00 price target by equities researchers at Credit Suisse Group in a research report issued to clients and investors on Monday, August 26th. The brokerage currently has a “buy” rating on the software giant’s stock. Credit Suisse Group’s price target suggests a potential upside of 13.94% from the stock’s previous close.

Summary…..

Microsoft has a market cap of $1,069.34 billion, a PE ratio of 28.95, a PEG ratio of 2.44 and a beta of 1.22. The company has a debt-to-equity ratio of 0.71, a current ratio of 2.53 and a quick ratio of 2.50. Microsoft Co. has a one year low of $93.96 and a one year high of $141.68. The firm has a 50-day moving average of $137.36 and a 200-day moving average of $128.25.