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Analyst Blog

Yesterday, MasterCard Inc. (MA - Analyst Report) announced a five-year strategic alliance with the UK’s most dominant communications company, Everything Everywhere. The card processing giant took this step in order to expand its digital payment platform across the Atlantic.

This collaboration will allow MasterCard to enhance mobile commerce (m-commerce) and other digital payments services in the extensive UK market, where, at present Everything Everywhere enjoys a client base of more than 27 million customers.

Accordingly, the two entities intend to launch a co-branded prepaid mobile payment solution that will function on near field communication (NFC) process. This will enhance swiftness and security payments, thereby easing the customer’s mobile experience as it includes person-to-person money transfers along with online or offline shopping.

Subsequently, the service is also expected to aid the small business customers, while empowering over 100,000 retailers with contactless payments in UK.

Meanwhile, MasterCard and Everything Everywhere are already associated with the first NFC-based payment service in UK – Orange QuickTap, launched three years back and Orange Cash pre-paid card, which was initiated last year.

We believe the collaborated initiative is expected to be a valued advancement in the rapidly growing e-commerce arena. Additionally, it will also help the two entities explore newer markets apart from enhancing the services of the existing ones.

Given the regulatory challenges being faced by the credit and debit cards, the move of MasterCard to re-direct its synergies in the e-commerce space appears to be a viable option. This is due to the fact that mobile users are increasingly becoming more adept at mobile banking these days.

Based on this, in March this year, MasterCard also joined with UK-based Vincento in a five-year partnership, in an attempt to expand prepaid card opportunities in the European market.

We believe ease of access and the less time consuming nature of mobile banking would make it very popular among mobile subscribers. There lies ample scope of development in this field in the future.

Hence, through the rapidly growing e-commerce and m-commerce technologies, card giants such as MasterCard, Visa Inc. (V - Analyst Report) and American Express Co. (AXP - Analyst Report) are consistently establishing an alternative to the traditional banking model. The new technologies are also aiding the company to channelize their resources in order to adapt to the changing market dynamics and better penetrate the global markets. 

Earnings Review

Beginning this month, MasterCard reported its second-quarter 2012 operating earnings per share of $5.65, which modestly surpassed the Zacks Consensus Estimate of $5.56. This also outpaced the year-ago quarter’s earnings of $4.76 per share.

The better-than-expected results were primarily due to the outcome of better pricing, increased number of processed transactions, strong gross dollar value (GDV) growth and lower tax rate. The positives also drove the operating cash flow and retained earnings. However, higher-than-expected operating expenses partially limited the margins’ upside.

Meanwhile, the Zacks Consensus Estimate for the third quarter of 2012 earnings is currently pegged at $5.92, which is about 5% above the prior-year quarter’s earnings results. Of the 27 firms covering the stock, 3 revised their estimates upward in the last 30 days, while 22 downward revisions were witnessed.

The higher number of downward revisions reflects the litigation settlement and other expenses that MasterCard is expected to incur in the second half of 2012 amid the sluggish economic environment. For 2012, earnings are expected to jump about 17% year over year to $21.83 a share.

MasterCard carries a Zacks Rank #3, which implies a near-term Hold rating, while our long-term recommendation remains Neutral.

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