Everywhere you look there seems to be malaise about global economic growth and the outlook for markets. Forecasts for economic growth are continuously downgraded, and more than a third of global bonds carry a negative yield as investors rush to safety.

However, digging deeper in the data uncovers a market disconnect between this wall of worry and a booming global payments processing industry. 

#-ad_banner-#Visa Inc. (NYSE: V) beat expectations to report a 10% increase in global payment volume and a “remarkably steadfast consumer in the face of significant global instability.” 

Here in my office in Colombia, I’m watching the shift to a cashless society happen first hand as people get tired of carrying large stacks of bills and instead opt for credit and debit cards. This shift in emerging markets could carry global payment growth, with Boston Consulting Group (BCG) forecasting as much as $900 billion in transaction-based revenue growth up for grabs through 2024.

One market leader is taking advantage of the Brexit shakeup to snap up a competitor at a 12% discount, expanding its global footprint. Even better, its board just authorized a massive share buyback, and earnings this year could be well over expectations.

Consumers Seem Unaffected By Global Economic Malaise
Every time the market reaches new highs, investors are reminded of sluggish economic growth and central bank policy that may be tapped out. The International Monetary Fund (IMF) has once again cut its outlook on 2016 growth, forecasting the global economy to improve by just 3.1% this year and 3.4% in 2017 as Brexit uncertainties weigh. 

As the market fights off disappointing earnings reports and economists lament about the outlook for the rest of the year, it seems that consumers haven’t gotten the message that they should be worried. 

Using the Atlanta Fed’s GDP growth model, second quarter consumer spending is expected to jump 4.5%,  its strongest pace since Q1 2006. Recovering income growth, low gas prices and greater use of debt could all propel spending this year. 

BCG reported growth in every geographic region in its 2015 Global Payments Report, and forecast that global payment processing could grow 6.2% annually to $1.99 trillion by 2024. That would mean $900 billion in payment and transaction business revenue growth up for grabs over the ten-year forecast period. 

Growth in emerging markets is leading the pack as consumers continue the shift to credit-driven economies. Asia-Pacific and Middle East/Africa are expected to post 10% annual growth, followed closely by Latin America with 7% and even 5% annual growth in North America.

Retail transactions are expected to remain the dominant form of global payments, accounting for 78% of total payments revenue in 2014. Within retail transactions, credit and debit card transactions are expected to account for 61% of total revenue growth through 2024. That could mean almost $550 billion in revenue growth for credit card companies.

MasterCard Pounces On A Brexit Discount
Mastercard Inc. (NYSE: MA) is riding the wave of international growth as payment processing becomes a larger share of purchases and people move away from cash transactions. Gross dollar volume in the international segments grew between 14% and 16% last year on a currency-neutral basis, while even the more mature U.S. market volume grew 7% on the year.

The company recently announced its acquisition of VocaLink, a UK-based company that processed more than 11 billion transactions last year, totaling ₤182 million ($139 million). Priced at $920 million, the deal would have cost MasterCard $1.04 billion before the Brexit vote. The acquisition helps MasterCard beef up its business-to-business and peer-to-peer business lines and to increase its global footprint. While the sales from VocaLink are relatively small, transaction volume is very high on its large network and could add meaningfully to MasterCard. 

Shares of MasterCard trade for 26.0 times expected fiscal 2017 earnings of $3.55 per share, which are seen just 3.2% higher from last year on revenue growth of 8.2% to $10.5 billion. While the 26-multiple is right at the five-year average on trailing earnings, shares traded as high as 28.9 times trailing in April after the company beat first quarter earnings. 

The major headwind to earnings expectations continues to be dollar strength, as foreign currency translation led to a 7% negative impact in 2015 on an 8.3% increase in the dollar against a basket of currencies. There’s reason to believe this year could be the turnaround for dollar earnings pain. After all the events that should have led to the greenback surging, from terrorist attacks overseas to Brexit and negative yield government bonds, the USD is down 1.8% so far this year.

Taking advantage of weak sentiment around earnings growth, MasterCard’s board authorized a share repurchase program of up to $4 billion that became effective in February. The buyback amounts to 4% of shares outstanding and could help to boost earnings per share.

My own estimate of $3.75 per share in 2016 earnings is based on the buyback, slightly higher sales on a stronger consumer and a turn to neutral effect on currency translation. There’s a chance for even higher earnings on a weaker dollar and stronger profitability. A multiple of 28-times earnings puts my one-year target at just under $105 per share for a 10% gain on the current trade.

Risks To Consider: Shares are already valued around their historic multiple and could be susceptible to a selloff in the general market.

Action To Take: Take advantage of near-term undervalued Mastercard to go long on the potential for a longer-term boost as it takes advantage of a weak British pound to add to its network. 

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