As Europeans face mounting financial strains, willMasterCard (
) feel their pain?
Over a quarter of MasterCard's total spending volume stems
Investors will get a better sense of Europe's impact -- and
the rest of the world's -- on Wednesday, when the Purchase,
N.Y.-based card company reports second-quarter results.
Last week, larger rivalVisa (
) reported profit and revenue that beat Wall Street estimates for
its June-ending quarter, sending shares of both card firms
Visa shares have outperformed MasterCard's this year, and some
say its scant exposure to Europe has something to do with it.
"Europe is more of a sentiment issue for Visa. It's doing OK
for MasterCard," said Robert W. Baird analyst David Koning.
Visa doesn't include Europe in its operating results, except
for some licensing and service fees. Visa Europe broke off from
Visa as a separate company prior to its 2008 IPO.
In MasterCard's first quarter, gross dollar spending volume in
Europe rose 18.5% in local currency vs. the prior year.
Like Visa, No. 2 MasterCard processes payment transactions
over its network. But unlike banks that issue cards and
rivalAmerican Express (
), it doesn't take on any credit risk.
It's About Volume
The more volume handled over its network, the better. Visa
said its global payment volume grew 6% in the June-ending
quarter, a slower pace than before.
And Visa's 10% growth in revenue in the recent quarter to
$2.58 billion, which beat forecasts by a small margin, was the
smallest gain in almost three years.
MasterCard derives well over 60% of its volume from outside
the U.S., more than Visa. And many of those markets are faster
growing emerging ones.
MasterCard's international footprint is "underappreciated,"
said Bill Carcache, an analyst with Nomura Securities.
But MasterCard's larger international footprint leaves it more
exposed than Visa to foreign currency risk, analysts say. A
stronger dollar puts a crimp on revenue generated in Europe and
some other foreign currencies, such as Brazil's, when reported
back in U.S. dollars.
Though European spending for MasterCard in the first quarter
rose 18.5% locally, growth was only 13.3% when translated into
In 2011's first quarter, it was the opposite: the foreign
exchange translation worked in MasterCard's favor.
Foreign exchange didn't have much impact on Visa's June-ending
quarter, management said.
Europe may not hurt MasterCard as much as some investors
expect. Only 5% spending volume in Europe is from problem
countries such as Portugal, Italy, Greece and Spain, says
"Most of its volumes come from northern Europe," he said.
American Express, he reminds, reported that spending in the
second quarter grew 5% in Germany and 4% in the U.K., while
volumes in Spain fell 5% and were flat in Italy.
In the U.S., MasterCard has been gaining debit-card volume at
Visa's expense, thanks in large part to new federal rules on
PIN-debit issuance and routing.
The business was Visa's to lose: It had long been the leader
in U.S. debit. In the June-ending quarter, Visa's debit volume
fell 9% over the prior year.
"You can continue to expect MasterCard growth in U.S. debit at
Visa's expense," Carcache said.
PIN-debit comes with lower revenue yields, though not
necessarily lower operating margins, as MasterCard CEO Ajay Banga
pointed out late last year in a conference call.
"Given the scalability of our network, we are able to process
these additional transactions at very low incremental costs," he
MasterCard's U.S. debit spending in the first quarter jumped
20.7% to $152 billion.
The company has posted six straight quarters of double-digit
revenue growth and even stronger profit growth.
Some of the gains have come from big business wins, says
Koning, such asSunTrust 's (
) debit portfolio conversion last fall and, earlier, MasterCard's
expanded processing relationship withItau Unibanco (
) in Brazil, to name a couple.
But those pops will soon be winding down, Koning says, if they
haven't already, resulting in "a period of a little
Analysts surveyed by Thomson Reuters estimate that
MasterCard's second-quarter revenue will grow 13% over the
earlier year to $1.88 billion. That's down from 17% growth in the
first quarter and 20% in the fourth quarter.
They see earnings rising 17% to $5.57 a share, down from the
first quarter's 25% growth.
"We expect some slowing in spending trends for everybody on
tougher comps from a year ago and on a global economy that has
slowed over the last three months," said Bob Napoli, analyst with
William Blair & Co.
Visa, however, reported adjusted profit growth of 25% in the
June-ending quarter, 11 cents a share above views. That excluded
$4.1 billion in reserves for a merchant-lawsuit settlement.
MasterCard, Visa and major banks recently agreed to settle a
merchants' class-action lawsuit, alleging price fixing on swipe
fees. MasterCard's share of the payout is $2.2 billion. Visa's is
The agreement still needs final court approval. Wal-Mart (WMT)
is opposed to it, saying some of the terms don't go far
In addition to a temporary cut in merchant swipe fees, a
no-surcharge rule on credit-card purchases would be
Will new surcharges by merchants harm card spending? Perhaps
not too much, observers say.
Ten states already prohibit surcharges and those 10 states
account for 40% of MasterCard's U.S. volume, says Carcache. He
doesn't believe merchants will want to put off customers by
imposing a surcharge at the point of sale.
Meanwhile, MasterCard will continue to benefit from the
ongoing worldwide shift from cash and checks to plastic, industry
"Even though in the short term you have some economic
weakness, over the long term (MasterCard and Visa) have
tremendous tail winds," said Napoli.