MasterCard Sticks to Neutral - Analyst Blog

By Zacks Equity Research,

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Recently, we reiterated our Neutral recommendation on MasterCard Inc. ( MA ) based on its accelerated growth momentum, risk-free balance sheet and competitive advantage, which are partially offset by higher acquisition and operating expenses.

The company's first-quarter 2012 operating earnings per share of $5.36 modestly surpassed the Zacks Consensus Estimate of $5.30 and also outpaced the year-ago quarter's earnings of $4.29 per share. Net income for the reported quarter stood at $682 million, spiking 21.4% from $562 million in the prior-year quarter.

The year-over-year upbeat results were primarily due to better pricing, an increased number of processed transactions, strong gross dollar value (GDV) growth and lower tax rate. While MasterCard is steadily gaining share of the U.S. debit card market, its latest acquisitions DataCash and Access Prepaid have started contributing to the earnings. However, higher-than-expected acquisition and operating expenses partially limited the margins upside.

MasterCard continues to drive growth through increased cross-border volumes, improved pricing along with consistent growth of processed transactions, which rose 29% year over year in the first quarter of 2012. Moreover, the slow but steady recovery in macro-economic factors is leading to improved consumer, business and government spending, eventually impacting the top line and margins positively.

Meanwhile, the debit card business also continues to post modest growth now as MasterCard is able to process about half of the U.S. debit cards. The company continues to diversify its product portfolio through innovations that include ecommerce, 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.

MasterCard also enjoys strong cash and available-for-sale investment position along with strong retained earnings and no long-term debt for over a couple of years now. A strong operating cash flow along with a $2.75 billion unused credit facility further provides acquisition opportunities as well as scope for liability reduction, stock repurchase and capital expenditure that will enhance the operating and competitive leverage against arch-rival Visa Inc. ( V ).

MasterCard remains focused on its inorganic growth, through acquisitions and alliances, as part of its long-term growth strategy. The two latest acquisitions - DataCash in 2010 and Access Prepaid in 2011 - have increased MasterCard's operational efficiencies by about 25% so far, thereby complementing the company's long-term growth strategy.

On the flip side, though, MasterCard continues to face headwinds in maintaining the cost of operations of its vastly expanded business. While personal costs are trending up due to severance-related charges, the company's expenses on fixed operations, acquisitions, rebates, incentives, legal, interest and other non-operating expenses continue to weigh significantly on the bottom line.

Moreover, currency and interest rate fluctuations along with higher rebates and incentives are passed on to the customers and intermediaries continue to weigh on the margins of the company. Going ahead, intense competitive pressure and higher expenses in the midst of the ongoing weak global cues could saturate the margins and bottom-line results.

MasterCard's history of operations have also been tainted by several state and federal lawsuits such as litigation cases where interchange rates are violated, as well as some involving currency conversion practices and pricing structure. The outlook is further hampered by the ongoing regulatory challenges that are being faced by the card industry, and which does not leave MasterCard unscathed.

In the future, any substantial payment of damages would not only have an adverse effect on the financials, but generating less expensive cards, given the strict regulation on higher-end cards, is also projected to trim a chunk of the top line.

Overall, based on the pros and cons, the Zacks Consensus Estimate for the second quarter earnings is currently pegged at $5.62 per share, shoring up about 18% year-over-year. In the last 30 days, 17 of the 27 firms covering the stock have raised their estimates upward, while 6 downward revisions were witnessed.

Additionally, MasterCard carries a Zacks Rank #2, indicating slight upward pressure on the shares over the near term and suggesting a Buy recommendation. However, the long-term stance remains Neutral.

MASTERCARD INC (MA): Free Stock Analysis Report
VISA INC-A (V): Free Stock Analysis Report
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Zacks Investment Research

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

This article appears in: Investing , Business , Stocks
Referenced Stocks: GDV , MA , V

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