If Oil Prices Rise to $150, Will MasterCard Stock Get a Lift?

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MasterCard ( MA ) is the second largest global payment solutions company in the world after Visa ( V ), and processes approximately 21 billion transactions each year. The company provides a variety of services to support the credit, debit and related card payments of over 24,000 financial institutions across the globe. Apart from Visa, its major competitors are Discover ( DFS ), American Express ( AXP ), Diners Club and JCB.

Our price estimate for MasterCard stock is $214 , which is about 9% below market price.

MasterCard charges customers for its payment-related services, primarily based on the volumes they generate on MasterCard-branded cards. MasterCard's total revenues are largely a function of the number of transactions processed, as well as the gross dollar volume of purchases.

Gasoline is one of the most frequent items purchased on credit cards. With U.S. consumption at 9.2 million barrels per day during December 2010, the growing mix of customers opting to purchases gasoline on a credit card makes this item a key revenue source for card networks.

Scenario: Crude Oil Price Reaches $150 per Barrel

MasterCard charges gas stations when they accept payments for fuel using MasterCard-branded cards. The charges depend upon the number of transactions as well as the dollar value of transactions. High crude oil prices would result in high fees charged by MasterCard, cutting into the margins of the gas station owner. This was the reason why many gas stations offered 5-8 cents discounts on gasoline if customers paid by cash rather than credit card when crude oil prices jumped to nearly $140 per barrel during 2007-08.

Crude oil prices increased by about 18% last year and, according to some estimates, may reach $150 per barrel by 2014. If this price level were to be reached due to inflationary pressure and growth in demand from emerging countries, aggregate dollar purchases of gasoline would see a corresponding increase.

MasterCard's authorization, settlement and switch fees charged to issuers and acquirers for transaction authorization would get a lift from this potential increase in gasoline purchases. We estimate that MasterCard's authorization, settlement and switch fee per transaction will decline to 7 cents from 2013 onwards, from its current level of 8 cents, due to high competition and regulatory changes. However, a crude oil price of $150 a barrel by 2014 could help maintain the current level of 8 cents per transaction, generating a 6-7% increase in our base price estimate for MasterCard.

Drag the trend line in the modifiable chart above to see how various authorization, settlement and switch fee transaction scenarios could affect MasterCard's stock value.

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You can see the complete $214 Trefis Price estimate for MasterCard's stock here .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AXP , DFS , MA , V

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