We have reiterated our Neutral recommendation on
) based on its steady growth profile amid the volatile economic
and regulatory environment. The company reported operating
earnings of $6.17 per share in the third quarter of 2012, which
noticeably outpaced the Zacks Consensus Estimate of $5.93 per
share and the year-ago quarter's earnings of $5.63 a share.
The better-than-expected results were largely 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
Over the past few years, MasterCard has been diversifying 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 it to capitalize
on the most promising growth opportunities, even in the emerging
economies. A strong and diverse product portfolio also helps the
company mitigate the challenges from the recent regulations and
economic volatility across the globe. Management's guidance of
generating double-digit top-line growth of about 12-14% in the
next couple of years also reflects a sustained growth momentum
and bodes well for the ratings of the company.
We further believe that MasterCard's strategy to achieve
long-term growth through global acquisitions, alliances and its
array of user-friendly and flexible products are also crucial for
sustaining the competitive pressure and generating optimism over
management's expectation of delivering earnings growth of over
20% in the next 2-3 years. Additionally, the company enjoys a
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.
However, MasterCard continues to face headwinds in maintaining
the cost of operations of its vastly expanded business. While
operating costs continue 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. Management's
attempt to maintain at least 50% in operating margins over the
next couple years also reflects the impact of these
Moreover, intense competitive pressure from arch rivals such
American Express Co.
),in the midst of the ongoing weak global cues is likely to add
to the woes. Further, the sluggish and volatile credit quality of
the market, amid 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
The currency and interest rate fluctuations along with the
higher rebates and incentives passed on to the customers and
intermediaries will continue to weigh on the margins of the
company. Subsequently, difficult comps, timing of the deal
renewals and the economic volatility has led management to peg
top-line growth below 13% for the second half of 2012.
Hence, based on the pros and cons, the Zacks Consensus
Estimate pegs earnings for the fourth quarter of 2012 at $4.78
per share, which is about 19% higher than the year-ago quarter.
For 2012, earnings are expected to climb about 17.5% over 2011 to
$21.96 per share.
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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