John Jamgochian 9/3/2010

MasterCard Incorporated (NYSE: MA - $206.98) BUY

Year EPS EBIT (MM) P/E Equity Value/share
2012E $19.54 $3,678 12.1x $398 Dividend: $0.60 Current Yield: 0.3%
2011E $16.74 $3,201 14.1x $331 Shares O/S: 131.0 million
2010E $13.74 $2,745 17.2x $269 52-Week Range: $269.88 - $191.00
2009A $11.16 $2,260 21.1x $211
Thesis
The impact of the Durbin Amendment on MasterCard is currently misunderstood by the market. The components of
the amendment – interchange regulation, credit min/max rules, merchant discounting, and network exclusivity – should
not have a material impact on the company and in the case of network exclusivity, could actually provide MasterCard
with a significant opportunity to gain share in the highly profitable signature debit market. At the current price of
$207, shares of MasterCard are mispriced and trade at a 42% discount to estimated intrinsic value (see DCF valuation
in model). In addition, the Fed’s release of its initial position on interchange fees in January 2011 should serve as a
catalyst to unlock the value in MasterCard’s shares.

Company Overview
MasterCard is a leading global payment solutions company that provides a variety of services in support of the credit,
debit and related payment programs of approximately 23,000 financial institutions and other entities that are the
company’s customers. Through their three-tiered business model as franchisor, processor and advisor, they develop
and market payment solutions, process payment transactions, and provide support services to their customers and,
depending upon the service, to merchants and other clients. MasterCard manages a family of well−known, widely
accepted payment card brands, including MasterCard®, MasterCard Electronic™, Maestro® and Cirrus®, which the
company licenses to their customers. As part of managing these brands, they also establish and enforce rules and
standards surrounding the use of their payment card network. Cardholder and merchant relationships are managed
principally by the company’s customers. Accordingly, they do not issue cards, extend credit to cardholders, determine
the interest rates (if applicable) or other fees charged to cardholders by issuers, or establish the merchant discount
charged by acquirers in connection with the acceptance of cards that carry our brands. MasterCard generates revenue
by charging fees to their customers for providing transaction processing and other payment−related services and
assessing their customers based on the dollar volume of activity on the cards that carry their brands (see Appendix).

End Markets
The two most important underlying global industry drivers in payments today are 1) the ongoing secular shift away
from paper-based payment types to card and other electronic based payments and 2) the economic development in key
emerging markets including Brazil, Russia, and Central and Eastern Europe, India, and China. These two trends
should support significant global industry growth over the coming years, even under subdued economic conditions.
• Paper to plastic: There is a strong secular shift from paper to plastic. The chart below shows that while
global personal consumption expenditures (PCE) grew at more than an 8% CAGR between 2003 and 2008,
electronic payments grew at more than a 14% CAGR, with electronic payments rising from 35% of PCE in
2003 to 45% in 2008.
o Although cash avoids numerous processing costs, it is often considered more burdensome than
cards by consumers and merchants alike. For the consumer, the benefits of cards are faster
transactions, convenience of not carrying cash, improved theft and loss prevention, and easy record
keeping. For merchants, the benefits of accepting cards are increased sales, faster payments, and
lower theft, handling, and transportation costs.
o Debit is growing faster than credit as debit takes share from cash and check without cannibalizing
credit volumes.
 • Emerging Markets: International markets offer greater card growth potential than the U.S. markets owing to
both stronger economic growth and lower levels of card penetration. As shown below, the penetration of
payment cards varies substantially by country, but some of the largest and fastest growing countries from a
GDP and PCE perspective have among the lowest card penetration rates. The Nilson Report, a trade journal
for the payments systems industry, estimates that over the next five years, U.S. transactions will increase 7%
annually. This compares to considerably faster growth internationally of approximately 14%, including 19%
growth in Asia, 17% growth in Middle East/Africa, 13% growth in Latin America, and 11% growth in
Europe.

Competitive Landscape
While they are competing networks, MasterCard and Visa are the two dominant, truly global networks in the industry,
positioning both of them well for the ongoing migration of payments from cash and check to electronic forms. Unlike
their remaining competitors, V and MA are players in both the larger credit market and the faster growing debit
market, whereas competitors like AXP and DFS either have no debit business or a marginal one. Market shares have
been very stable as customers (issuers) are locked up in 5-7 year contracts. In 2009, MasterCard reported about $2.5
trillion of volume excluding Maestro (about 7.6% of global PCE) compared with Visa, which reported about $4.4
trillion (about 13.3% of global PCE).

Durbin Amendment
On July 21st, the Dodd-Frank Bill was signed into law, which included the Durbin Amendment. The amendment has
four features to it: interchange regulation, credit min/max rules, merchant discounting, and network exclusivity.
• Interchange regulation: Reduced interchange will put downward pressure on issuer economics to the extent
the Fed regulates interchange to lower levels. Issuers are likely to respond by raising fees and/or reducing
services to consumers. It is highly unlikely that banks will go after network fees (V and MA fees for
assessments and processing) to make up for lost profitability as the network’s fees are only approximately 3-
4% of an issuers total card revenues. In Australia, when interchange became regulated and was reduced by
half, issuers responded by adjusting fees, cutting rewards programs, and reducing services; they did not try to
 put pressure on the networks fees. The amount involved in adding fees, reducing rewards and services is
substantially greater than any potential network fee concessions. We believe that debit may not grow as fast
as originally expected and that networks will not be able to continue to raise prices 2-3% annually.
• Credit min/max rules: This new rule allows merchants to have $10 be the minimum amount that can be put
on a credit card. Transactions with tickets less than $10 represent only about 1% of GDV. If those
transactions went away there would not be a material impact on the company.
• Merchant discounting: This rule allows merchants to discount for various forms of payment. Merchants can
already discount for cash. It is highly unlikely that merchants will try to steer customers to lower cost
payments systems or have different pricing for products based on the type of network used (credit vs. debit; V
vs. MA vs. AMEX). When “honor all cards” was rescinded, First Data said that 21 merchants out of
1,000,000 tried to steer customers to lower forms of payment; they all stopped within 6 months.
• Network exclusivity: Requirement that issuers include more than one network routing option on their card.
This could play out in many ways, but in almost every scenario, MasterCard should see significant upside.
MasterCard does have a number of exclusive network routing arrangements, and this legislation will result in
their exclusive issuers participating in other networks. However, the opportunity to gain more business is
significantly larger than business put at risk. MasterCard has about 27% and 4% of U.S. signature and U.S.
PIN debit market share, respectively. For every $1 of GDV they could lose because of exclusivity rules,
there is $3 they could gain. In a best case scenario where the Fed requires 2 signature networks per card, this
could allow MasterCard to gain half the U.S. signature debit market and would result in an incremental $3.20
EPS in FY 2012, which is currently not factored into the FY 2012 EPS estimate of $19.55.

Revenues
MasterCard generates revenues by charging fees to their customers for providing transaction processing and other
payment-related services and assessing their customers based on the dollar volume of activity on the cards that carry
the company’s brands.
o Domestic assessments: Fees charged to issuers and acquirers based primarily on the volume of activity on
MasterCard and Maestro branded cards where the merchant country and cardholder country are the same.
o Cross-border fees: Fees charged to issuers and acquirers based on the volume of activity on MasterCard and
Maestro-branded cards where the merchant country and cardholder country are different.
o Transaction processing fees: Fees that are charged for both domestic and cross-border transactions and are
primarily based on the number of transactions.
We are forecasting volumes to grow at a CAGR of approximately 9% from FY 2010 to FY 2014, which is consistent
with consensus and industry estimates. Due to increased regulatory pressure we are expecting that MasterCard will not
be raising its pricing over the next few years. These estimates result in revenues of approximately $5.5 billion in FY
2010, which is expected to grow to approximately $7.6 billion in FY 2014.

Margins
MasterCard has a lot of operating leverage due to its highly fixed cost structure; incremental margins on transactions
are estimated to be approximately 80%-90%. This fixed cost structure has allowed the company to expand EBITDA
margins from 23.1% in FY 2006 to 47.3% in FY 2009. These high incremental margins when coupled with the
company’s high single digit revenue growth should result in an EBITDA margin of 52% in FY 2010, which is
expected to grow to approximately 62% in FY 2014. These margins produce EBITDA of approximately $2.9 billion
and $4.8 billion in FY 2010 and FY 2014, respectively.

Valuation
MasterCard has a global franchise offering high returns on capital and significant earning power growth. As such we
are giving it a higher than market multiple of 12.0x EBITDA minus CapEx. Applying a 12.0x multiple to our FY 2010
EBITDA minus CapEx estimate of approximately $2.7 billion results in an equity value per share of approximately
$270, which is estimated to grow to approximately $530 per share in FY 2014 (see Valuation Analysis below). Our
valuation on a P/E basis implies a 19.0x multiple in FY 2010, which compresses to an 18.0x multiple in FY 2014 due
to leveraging of litigation expenses. A discounted cash flow valuation results in an estimated intrinsic value of
approximately $360 per share (see Discounted Cash Flow Analysis below).

Catalyst
The release of the Fed’s initial position on reasonable and proportional levels of debit interchange fees, which is
expected to occur in December or January, should serve as a catalyst to unlock the value in MasterCard shares. The
final version of the Fed’s interpretation of Durbin will be in April of 2011 (or earlier if the Fed finishes ahead of
schedule). See timeline in Appendix.
MasterCard Incorporated (NYSE: MA - $207.98) John Jamgochian

Capitalization Historical & Projected Operating Results

(in millions, except per share data) FY 12/31 (in millions, except per share data) 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E

Balance Sheet as of 6/31/2010 Gross Dollar Volume $1,923,000 $2,273,000 $2,536,000 $2,455,000 $2,662,820 $2,918,287 $3,217,077 $3,490,806 $3,782,737
Shares Outstanding 131.0 % Growth 16.3% 18.2% 11.6% -3.2% 8.5% 9.6% 10.2% 8.5% 8.4%
Options 0.0
Fully Diluted Shares 131.0 Net Revenue Yield (GDV) 0.173% 0.179% 0.197% 0.208% 0.208% 0.208% 0.206% 0.204% 0.202%
% Growth -2.6% 3.5% -2.3% 5.5% 0.2% -0.1% -1.1% -0.5% -1.2%
Market Price $207.98
Equity Market Capitalization 27,245.4 Revenues, Net $3,326 $4,068 $4,992 $5,099 $5,540 $6,067 $6,612 $7,139 $7,644
% Growth 13.2% 22.3% 22.7% 2.1% 8.6% 9.5% 9.0% 8.0% 7.1%
Plus: Debt 19.0
Plus: Hidden Liabilities 3,100.0 Adjusted EBITDA 769 1,209 2,060 2,408 2,885 3,359 3,850 4,321 4,770
Less: Cash (2,323.0) % Margin 23.1% 29.7% 41.3% 47.2% 52.1% 55.4% 58.2% 60.5% 62.4%
Less: Marketable Securities (1,166.0)
Total Enterprise Value 26,875.4 Net Income 50 1,086 (254) 1,463 1,771 2,101 2,452 2,800 3,096
% Margin 1.5% 26.7% -5.1% 28.7% 32.0% 34.6% 37.1% 39.2% 40.5%
TEV/EBITDA - CapEx (2011E) 8.5x
Earning Power per Share $2.93 $4.83 $8.90 $10.72 $13.69 $16.34 $19.21 $22.00 $24.38
% Growth 51.6% 64.4% 84.5% 20.4% 27.7% 19.4% 17.6% 14.5% 10.8%

Valuation Analysis
2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E
Adjusted EBITDA 769.0 1,209.2 2,060.3 2,408.2 2,884.7 3,358.6 3,850.0 4,321.1 4,769.7
CAPEX (94.8) (148.5) (173.8) (145.2) (173.0) (183.0) (183.0) (193.0) (203.0)
EBITDA-CAPEX 674.2 1,060.6 1,886.5 2,263.1 2,711.7 3,175.6 3,667.0 4,128.1 4,566.7
Valuation multiple 12.0x 12.0x 12.0x 12.0x 12.0x 12.0x 12.0x 12.0x 12.0x
Total Enterprise Value 8,090.2 12,727.7 22,638.0 27,156.8 32,540.2 38,106.9 44,004.2 49,537.7 54,800.5
Less: Debt (229.7) (229.8) (168.8) (21.6) (21.6) (21.6) (21.6) (21.6) (21.6)
Less: Hidden Liabilities (3,100.0) (3,100.0) (3,100.0) (3,100.0) (3,100.0) (3,100.0) (3,100.0) (3,100.0) (3,100.0)
Plus: Cash 1,185.1 1,659.3 1,505.2 2,055.4 3,022.3 5,175.3 7,697.6 10,567.7 13,732.8
Plus: Marketable Securities 1,492.3 1,503.2 971.3 1,342.1 1,342.1 1,342.1 1,342.1 1,342.1 1,342.1
Equity Value 7,437.9 12,560.3 21,845.7 27,432.8 33,783.0 41,502.8 49,922.4 58,325.9 66,753.8
Shares Outstanding- Diluted 135.8 135.2 130.1 130.2 125.5 125.5 125.5 125.5 125.5
Equity Value per share $55 $93 $168 $211 $269 $331 $398 $465 $532
Margin of Safety 23% 37% 48% 55% 61%

Adjusted EBITDA Earning Power Analysis

Removes litigation expenses 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E
Adjusted EBITDA $769.0 $1,209.2 $2,060.3 $2,408.2 $2,884.7 $3,358.6 $3,850.0 $4,321.1 $4,769.7
Hidden Liabilities -CAPEX (94.8) (148.5) (173.8) (145.2) (173.0) (183.0) (183.0) (193.0) (203.0)
Antitrust Litigation (-$2.2B) and AMEX Litigation (-$0.9) EBITDA-CAPEX 674.2 1,060.6 1,886.5 2,263.1 2,711.7 3,175.6 3,667.0 4,128.1 4,566.7
- Net Interest (61.2) (57.3) (103.6) (115.1) (66.0) (68.0) (68.0) (68.0) (68.0)
Management - Taxes (214.6) (351.2) (624.0) (751.8) (928.1) (1,056.6) (1,187.7) (1,299.2) (1,439.6)
CEO: Ajay Banga Earning Power 398.5 652.2 1,158.9 1,396.2 1,717.6 2,051.0 2,411.3 2,760.9 3,059.1
CFO: Martina Hund-Mejean Earning Power per share $2.93 $4.83 $8.90 $10.72 $13.69 $16.34 $19.21 $22.00 $24.38
Appendix

Economics of a Branded Network Transaction

In a typical transaction, a cardholder purchases goods or services from a merchant using a card. After the transaction is
authorized by the issuer using MasterCard’s network, the acquirer pays the amount of the purchase, net of a discount, to the
merchant. This discount, which we refer to as the merchant discount, takes into consideration the amount of the interchange
fee described below. The issuer pays the acquirer an amount equal to the value of the transaction minus any interchange fee
and posts the transaction to the cardholder’s account. MasterCard’s rules generally guarantee the payment of transactions
using MasterCard−branded cards and certain transactions using Cirrus and Maestro−branded cards between issuers and
acquirers.

In this four−party payment system, the economics of a payment transaction relative to MasterCard vary widely depending on
such factors as whether the transaction is domestic (and, if it is domestic, the country in which it takes place) or cross−border,
whether it is a point−of−sale purchase transaction or cash withdrawal, and whether the transaction is processed over the
company’s network or a third party network or is handled solely by a financial institution that is both the acquirer for the
merchant and the issuer to the cardholder (an “on−us” transaction). A significant portion of the merchant discount is generally
paid from the acquirer to the issuer (or netted by the issuer against amounts paid to the acquirer) in the form of an interchange
fee. The balance of the merchant discount is retained by the acquirer to cover its costs and profit margin. Acquirers may
charge merchants processing and related fees in addition to the merchant discount. Issuers may also charge cardholders fees
for the transaction, including, for example, fees for extending revolving credit. As described below, MasterCard charges
issuers and acquirers transaction−based and related fees and assessments for the services the company provides them.
Interchange fees represent a sharing of a portion of payment system costs among our customers participating in four−party
payment card systems.

Generally, interchange fees are collected from acquirers and passed to issuers (or netted by issuers against amounts paid to
acquirers) to reimburse the issuers for a portion of the costs incurred by them in providing services that benefit all participants
in the system, including acquirers and merchants. In some circumstances, such as cash withdrawal transactions, this situation
is reversed and interchange fees are paid by issuers. MasterCard establishes default interchange fees that apply when there are
no other established settlement terms in place between an issuer and an acquirer. The company administers the collection and
remittance of interchange fees through the settlement process; however, they do not earn revenues from them.

Fed Timeline
Comp Sheet

FY ending 9/30 2006 2007 2008 2009 2007 2008 2009

Visa

Total GDV (in $billions)

U.S. $1,716 $1,874 $2,052 $1,988 9.2% 9.5% -3.1%
Asia Pacific $644 $793 $985 $1,012 23.0% 24.3% 2.7%
Latin America $358 $448 $603 $588 25.1% 34.7% -2.5%
Canada $144 $167 $198 $171 15.9% 18.6% -13.6%
CEM EA $247 $351 $503 $502 41.9% 43.5% -0.2%
Total GDV $3,109 $3,632 $4,341 $4,261 16.8% 19.5% -1.8%

Credit GDV (in $billions)

U.S. $861 $921 $974 $844 6.9% 5.8% -13.3%
Non-U.S. $749 $894 $1,098 $1,066 19.4% 22.8% -2.9%
Total Credit GDV $1,610 $1,815 $2,072 $1,910 12.7% 14.2% -7.8%

Debit GDV (in $billions)

U.S. $857 $954 $1,078 $1,142 11.3% 13.0% 5.9%
Non-U.S. $646 $864 $1,191 $1,208 33.7% 37.8% 1.4%
Total Debit GDV $1,503 $1,818 $2,269 $2,350 20.9% 24.8% 3.6%

Total GDV (in $billions)

U.S. $1,719 $1,875 $2,052 $1,986 9.1% 9.4% -3.2%
Non-U.S. $1,395 $1,758 $2,289 $2,274 26.1% 30.2% -0.7%
Total GDV $3,113 $3,633 $4,341 $4,260 16.7% 19.5% -1.9%

FY ending 12/31 2006 2007 2008 2009 2007 2008 2009

MasterCard

Total GDV (in $billions)

U.S. $919 $1,019 $1,052 $977 10.9% 3.2% -7.1%
Europe $520 $657 $775 $722 26.3% 18.0% -6.8%
APM EA (apac + S asia, M E & Africa) $282 $348 $422 $484 23.4% 21.3% 14.7%
Latin America $125 $158 $184 $177 26.4% 16.5% -3.8%
Canada $77 $91 $103 $95 18.2% 13.2% -7.8%
Total GDV $1,923 $2,273 $2,536 $2,455 18.2% 11.6% -3.2%

Credit GDV (in $billions)

U.S. $610 $645 $631 $525 5.7% -2.2% -16.8%
Non-U.S. $810 $1,003 $1,168 $1,113 23.8% 16.5% -4.7%
Total Credit GDV $1,420 $1,648 $1,799 $1,638 16.1% 9.2% -8.9%

Debit GDV (in $billions)

U.S. $309 $374 $421 $452 21.0% 12.6% 7.4%
Non-U.S. $192 $251 $315 $362 30.7% 25.5% 14.9%
Total Debit GDV $501 $625 $736 $814 24.8% 17.8% 10.6%

Total GDV (in $billions)

U.S. $919 $1,019 $1,052 $977 10.9% 3.2% -7.1%
Non-U.S. $1,002 $1,254 $1,483 $1,475 25.1% 18.3% -0.5%
Total GDV $1,921 $2,273 $2,535 $2,452 18.3% 11.5% -3.3%
2012 Scenario Analysis

Current Estimates
MasterCard Visa Total
Signature Volume (Billions) 475 1,425 1,900
Share 25% 75% 100%
BP Yield 15 15 15
Signature Revenue (Millions) 713 2,138 2,850

Scenario 1
MasterCard Visa Total
Signature Volume (Billions) 950 950 1,900
Share 50% 50% 100%
BP Yield 15 15 15
Signature Revenue (Millions) 1,425 1,425 2,850

Scenario 2
MasterCard Visa Total
Signature Volume (Billions) 950 950 1,900
Share 50% 50% 100%
BP Yield 10 10 10 <-Potential price pressure as MA tries to gain share
Signature Revenue (Millions) 950 950 1,900

Revenue Changes
MasterCard Visa Total
Scenario 1 712.5 -712.5 0.0
Scenario 2 237.5 -1,187.5 -950.0

EPS Impact
MasterCard Visa
Scenario 1 $3.21 -$0.55 <--Assume 90% incremental margins
Scenario 2 $1.07 -$0.92

2012 EPS Scenarios

MasterCard Visa
EPS w/o signature impact $19.54 $5.11
Scenario 1 $22.75 $4.56
Scenario 2 $20.61 $4.19

Market Share of U.S. Purchase Volume Across Major Networks