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Recently, we reiterated our Neutral recommendation on MasterCard Inc. (MA - Analyst Report) based on its sustained growth momentum amid higher litigation expenses and regulatory challenges.

The company reported operating earnings of $5.65 per share in the second quarter of 2012. This outpaced both the Zacks Consensus Estimate of $5.56 and 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 GDV growth and lower tax rate. However, higher-than-expected operating expenses partially limited the margins upside.

Over the 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.

In addition, the company continues to diversify its product portfolio through innovations that include e-commerce, mobile payments (m-commerce), prepaid cards, smart cards and other value-added services in order to realign itself to capitalize on the most promising growth opportunities from both geographic and product development standpoints.

Going forward, the company is expected to deliver further on this momentum once the global economy revives to its historical highs. This is also evident from management s guidance of generating double-digit top-line growth of about 12–14%, in the next couple of years.

We believe that MasterCard’s long-term growth strategies through global acquisitions, alliances and its array of user-friendly and flexible products are also crucial for sustaining competitive pressures and generating optimism over management’s expectation of delivering earnings growth of over 20% in the next two to three years.

Despite the economic turmoil that eroded the reserves of most of the organizations, MasterCard enjoys strong cash and available-for-sale investment position along with strong operating cash flow, retained earnings and no long-term debt for over a couple of years now.

The capability of MasterCard to maintain strong liquidity and steady operating leverage, while strengthening its operating margins has led S&P to affirm its long-term and short-term counterparty ratings of “A-” and “A-2” in July 2012. This not only reflects a strong balance sheet but also provides acquisition opportunities as well as scope for liability reduction, stock repurchase and capital expenditure that will enhance the long-term growth.

On the flip side, the sluggish and volatile credit quality of the market, amid the furor of the recent global crisis, has adversely affected MasterCard’s credit and charge card growth, besides disturbing the pricing, credit allocation and business model of the company. Moreover, currency and interest rate fluctuations along with higher rebates and incentives passed on to the customers and intermediaries will continue to weigh on the margins of the company.

Going ahead, intense competitive pressure, from arch rivals such as Visa Inc. (V - Analyst Report) and American Express Co. (AXP - Analyst Report),in the midst of the ongoing weak global cues is likely to add to the woes. Subsequently, difficult comps, timing of the deal renewals and economic volatility has led management to peg top-line growth below 13% for the second half of 2012.

In addition, MasterCard continues to face headwinds in maintaining the cost of operations of its vastly expanded business. While operating costs continues to showcase an increasing trend, higher expenses on litigation settlements and other regulatory challenges not only weigh on the financials but also impose restrictions on the scope of business growth.

Hence, based on the pros and cons, the Zacks Consensus Estimate pegs earnings for the third quarter of 2012 at $5.92 per share, which is about 5% higher than the year-ago quarter. For 2012, earnings are expected to climb about 17% over 2011 to $21.83 per share.

MasterCardcurrently retains a Zacks #3 Rank, which translates into a short-term Hold rating and indicates no clear directional pressure on the stock in the near term.

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