As Europeans face mounting financial strains, willMasterCard ( MA ) feel their pain?
Over a quarter of MasterCard's total spending volume stems from Europe.
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 ( V ) reported profit and revenue that beat Wall Street estimates for its June-ending quarter, sending shares of both card firms higher.
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 ( AXP ), 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 dollars.
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 Carcache.
"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 said then.
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 ( STI ) debit portfolio conversion last fall and, earlier, MasterCard's expanded processing relationship withItau Unibanco ( ITUB ) 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 deceleration."
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 $4.4 billion.
The agreement still needs final court approval. Wal-Mart (WMT) is opposed to it, saying some of the terms don't go far enough.
In addition to a temporary cut in merchant swipe fees, a no-surcharge rule on credit-card purchases would be eliminated.
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 sources agree.
"Even though in the short term you have some economic weakness, over the long term (MasterCard and Visa) have tremendous tail winds," said Napoli.