Recently, we reiterated our Neutral recommendation on
MasterCard Inc.
(
MA
) 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
) and
American Express Co.
(
AXP
),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.
AMER EXPRESS CO (AXP): Free Stock Analysis
Report
MASTERCARD INC (MA): Free Stock Analysis Report
VISA INC-A (V): Free Stock Analysis Report
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