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We have retained our Neutral recommendation on MasterCard Incorporated (MA - Analyst Report) following the third quarter results.

Why the Reiteration?

Although MasterCard’s third quarter earnings of $7.27 outpaced the Zacks Consensus Estimate and improved from the year ago period, we are caustious due to increased regulatory compliances and the economic volatility in global markets.

Over recent years, the shift within the global payment industry from paper-based forms of payment such as cash and checks toward electronic forms of payment such as card payment transactions has created significant opportunities for the growth of MasterCard’s business. Going forward, this transition is projected to increase MasterCard's total revenue from the U.S. operations in the mid- to high-single digit range, while that from international operations will grow in double digits.

MasterCard remains focused on satisfying the demands of its customers and continues to provide improved services despite a challenging economic environment. The launch of MasterPass in Feb 2013, the partnership with the Commonwealth Bank of Australia this month and the upcoming launch of iD/PayPass-branded payments via DOCOMO’s iD mobile credit payment system in Japan, by Feb 2014, reflect this agenda. We believe such long-term growth strategies are also crucial to ease competitive pressure and generate optimism over management’s expectation of delivering earnings growth of over 20% in the next two to three years.

MasterCard, carrying a Zacks Rank #2 (Buy), also continues to drive growth through increased cross-border volumes and improved pricing along with consistent growth of processed transactions, which grew 13% in the first nine months of 2013. Also, the strong financial position of the company and encouraging outlook from the credit rating agencies place the company in a position to retain investor confidence.

On the tepid side, higher cost of operations and sluggish and volatile credit quality of the market are concerns for the company. Going forward, higher operating and non-operating expenses along with increasing legal claims, tax expenses, fixed overheads and currency fluctuations could saturate margins and bottom-line results.

Moreover, MasterCard faces several state and federal lawsuits such as litigation cases which might burden the financial position in future. Also, MasterCard is subject to increasing global regulatory focus in the payments industry. Going ahead, the actual effect of these regulations could turn out to be detrimental to growth.

Other Stocks to Consider

Some other stocks worth considering in financial services sector include Qiwi plc (QIWI - Snapshot Report), Global Payments Inc. (GPN - Snapshot Report) and Xoom Corporation (XOOM - Snapshot Report). While Qiwi carries a Zacks Rank #1 (Strong Buy), Global Payments and Xoom have a Zacks Rank #2 (Buy).

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