MasterCard's Q1 Results Impress; Cross-border Volumes Rise - Analyst Blog

On May 11, we issued an updated research report on MasterCard IncorporatedMA .

MasterCard's first-quarter earnings surpassed the Zacks Consensus Estimate and also improved year over year. The top-line improvement is primarily attributable to an increased number of processed transactions and strong gross dollar value (GDV) growth during the reported quarter. A lower tax rate also impacted the results positively.

MasterCard remains focused on customers' needs and continues to add value through an array of user-friendly and flexible products despite a challenging economic environment. The company initiated a Mobile Money Partnership Program ("MMPP") along with other initiatives to explore business opportunities within the under-banked and unbanked regions as well as small and medium-sized businesses in developing nations. The Mobile Point-of-Sale ("MPOS") Program initiative further ensures smooth, simple and secure transactions.

Additionally, MasterCard continues to drive growth through increased cross-border volumes and improved pricing. The company also witnessed a consistent growth in processed transactions, which improved 12% during the reported quarter. These signs are encouraging as they are the key revenue drivers for MasterCard.

MasterCard also focuses on inorganic growth as part of its long-term growth strategy. The latest acquisitions of Applied Predictive Technologies (in first-quarter 2015), Transaction Network Services' (TNS) Payment Gateway Services business, 5one Marketing Ltd., ElectraCard Services Private Ltd. (ECS) and Pinpoint are expected to enhance the company's turnkey payment processing solutions and customer loyalty.

MasterCard's solid liquidity position with improving cash and cash equivalents along with retained earnings and virtually no debt cushions its inorganic growth initiatives.

Moreover, the company is focused on sharing more profits with its shareholders. Based on its solid financial position, MasterCard's board of directors have been consistently increasing dividend and authorizing share repurchases. This reflects the company's solid financial position along with incremental capital deployment.

However, MasterCard continues to face headwinds in maintaining the cost of operations of its vastly expanded business. While increased personnel costs due to severance-related charges is a rising trend, 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.

The ongoing regulatory norms, currency fluctuations, slow pace of growth and operating challenges across various developed, underdeveloped and developing economies are expected to be disadvantageous to the company as these will adversely affect the top line and operating leverage.

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. It has also disturbed the pricing, credit allocation and business models of the company. Additionally, currency and interest rate fluctuations, along with higher rebates and incentives that have been passed on to customers and intermediaries, are expected to continue weighing on the margins of the company.

Adding to the woes, MasterCard has been slapped with several lawsuits in the past. The settlement charges further add to the company's expenses, thereby adversely affecting margins. Lawsuits and related settlement charges not only affect the company financials but also hamper its goodwill, and hence weigh on investor sentiments.

Currently, MasterCard carries a Zacks Rank #3 (Hold). Better-ranked players from the financial transaction services sector include Equifax Inc. EFX , Qiwi plc QIWI and Total System Services, Inc. TSS . All of these stocks hold a Zacks Rank #2 (Buy).

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

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

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