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MasterCard Beats on EPS, Misses Rev

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MasterCard Inc.’s (MA - Free Report) third-quarter 2012 operating earnings per share of $6.17 noticeably outpaced the Zacks Consensus Estimate of $5.93 and the year-ago quarter’s earnings of $5.63, primarily based on low share count.

Net income for the reported quarter stood at $772 million, climbing 7.8% from $717 million in the prior-year quarter. No such special items were recorded in both the comparable quarters.

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

Total revenue grew 5.5% year over year to $1.92 billion, although it marginally fell short of the Zacks Consensus Estimate of $1.94 billion. On a constant currency basis, net revenue increased 10.0%. The upside was primarily due to a 24.0% jump in the number of processed transactions to 8.7 billion along with a 14.0% increase in cross-border volumes.

During the reported quarter, GDV increased 14.0% to $918 billion, while worldwide purchase volume rose 12.0% year over year, on a constant currency basis, to $676 billion. As of September 30, 2012, MasterCard issued 1.9 billion MasterCard- and Maestro-branded cards.

Total operating expenses increased 4.7% year over year to $854 million. On a constant currency basis, operating expenses increased 8.0% over prior-year period.

The overall increase primarily resulted from a 13.7% year-over-year upsurge in depreciation and amortization expenses along with a 9.7% increase in general and administrative expenses. However, advertising and marketing expenses fell 12.0% year over year to $176 million.

Consequently, operating income rose 6.2% year over year to $1.06 billion in the reported quarter. Moreover, operating margin marginally rose to 55.5% from 55.1% in the year-ago quarter.

MasterCard's effective tax rate for the reported quarter was 27.6%, quite lower than 30.5% in the year-ago period, primarily attributable to a benefit from deduction related to software and additional export incentives.

Financial Update

As of September 30, 2012, MasterCard’s net operating cash flow increased 9.6% year over year to $2.08 billion. At the end of the reported quarter, cash and cash equivalents slightly reduced to $3.05 billion from $3.73 billion at 2011-end, while the long-term debt remained nil.

Meanwhile, retained earnings increased to $6.79 billion at the end of the reported quarter from $4.75 billion at the end of 2011. Total equity rose to $6.92 billion from $5.88 billion as of December 31, 2011.

Share Repurchase Update

On June 5, 2012, the board of MasterCard sanctioned a new $1.5 billion share repurchase program for its Class A common stock. The new share repurchase program has become effective now that the previous $2 billion share repurchase program has been completed in the reported quarter, which was expanded from $1 billion in April 2011.

Accordingly, during the reported quarter, MasterCard repurchased about 0.5 million shares for $216 million. Until October-end, MasterCard has bought back an additional 255,000 shares for approximately $119 million since the third quarter of 2012. Till date, about $1.1 million of stock remains available under the latest $1.5 billion share repurchase program authorization.

Dividend Update

On September 11, 2012, the board of MasterCard announced a regular cash dividend of 30 cents, which will be paid on November 9, 2012, to shareholders of its Class A common stock and Class B common stock as on October 10, 2012.

On August 9, 2012, MasterCard paid a regular cash dividend of 30 cents to shareholders of its Class A common stock and Class B common stock as on July 9, 2012.

Our Take

MasterCard’s prime peer, Visa Inc. (V - Free Report) is also scheduled to release its fiscal fourth quarter earnings after the closing bell today.

MasterCard benefits from strong secular demand growth, meaningful international exposure, diversified product portfolio, high barriers, excellent pricing power, risk-free balance sheet and impressive operating leverage. The recent strategic acquisitions and alliances also bode well for long-term growth. Also, the above-average earnings growth, strong competitive position and leverage to an eventual economic recovery will result in a relative valuation premium.

However, we are concerned about MasterCard’s resilience and ability to raise prices, increased operating and litigation expenses, the detrimental effects of the Consumer Protection Act in the U.S. and scope for increasing cash flow. Based on these factors, MasterCard carries a Zacks Rank #2, which implies a near-term Buy rating, while our long-term recommendation remains Neutral.

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