A report by the U.S. Commerce Department showed that retail sales rose by 0.4% in March 2011 compared to the previous month. An increase in retail spendings indicates sound consumer health and rising transaction volumes for payment network providers such as MasterCard ( MA ) and competitors like Visa ( V ), American Express ( AXP ), Discover ( DFS ) and Capital One ( COF ).
Retail sales data excludes volatile categories like autos, gas and building materials and includes discretionary purchases such as electronics, furniture and apparel. Rising retail sales is particularly encouraging for the economy as it came against a backdrop of rising gas prices which generally causes consumers to curb spending on discretionary items. However, it is necessary to note that the increase was the smallest in nine months, and prompted some analysts to decrease their estimates for economic growth in the first quarter.
Increasing consumer health can be attributed to a broader economic recovery that sparked the addition of 216,000 jobs in March 2011. Unemployment rate also came down to 8.8%, making consumers slightly more comfortable to increase spending.
Rising retail sales should push transaction volumes up for payment network providers. We estimate that the number of transactions processed by MasterCard will get a push from rising retail sales and will approach 57 billion by the end of our forecast period, an annual growth rate of 14% off of a roughly 23 billion base in 2010.
Transaction fees represent almost 32% of MasterCard's stock value by our estimates. We pin the company's stock value at about $293 , about 5% above market price.