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MasterCard's 2H12 Growth to Be Tepid

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At a recent investor meeting, MasterCard Inc. (MA - Analyst Report) laid down its growth projections for the upcoming quarters. The guidance reflected a lukewarm top-line escalation in the second half of 2012.

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. The sluggish and volatile credit quality of the market, amid the recent global crisis, has adversely affected MasterCard’s credit and charge card growth.

Furthermore, 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.

In addition, strong competition and stringent regulatory reforms have disturbed the pricing, credit allocation and business model of the company. Subsequently, currency and interest rate fluctuations, along with higher rebates and incentives passed on to the customers and intermediaries, have been consistently weighing 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), amid ongoing weak global cues is likely to add to the woes.

As a result, management disclosed its tapered long-term anticipation of achieving compounded annual growth of 11–14% for the period 2013–2015, while operating margin could be sustained at least at 50%. As well, earnings per share are expected to grow at a compounded annual rate of minimum 20%.

Moreover, card giants such as MasterCard and Visa are expected to witness bottom-line growth of about 20% over the next 3–5 years, which is quite lower than the historic average 30% growth achieved in the past 5 years. Even Thomson Reuters assimilated the street expectations that MasterCard would generate $1.94 billion in revenues in the third quarter of 2012, which would climb 7% from the year-ago quarter.

Nevertheless, we believe that a stable economy and a proactive expense management could help the card giants, particularly MasterCard to rebound to its historical highs. 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. As a result of this strong balance sheet position, the company aims to continue executing its share repurchase program even in the current bumpy patch.

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 that of the year-ago quarter. For 2012 and 2013, earnings per share are expected to climb about 17%, over prior year, to $21.84 and $25.61, respectively.

MasterCard currently 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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