Earnings Preview: Tough Economic Conditions Will Put Pressure On Master Card’s Bottom Line

July 27th, 2016 by Trefis Team
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Master Card (NYSE: MA) is set to report earnings for the second quarter of fiscal year 2016 on Thursday, July 28th. In the previous quarter, the company disappointed with a 6% decline in earnings per share (EPS), despite a 10% increase in revenue. The company attributed the decline to the impact of currency fluctuations and the loss of pre-tax credits. Its selling and administrative expenses rose by 34% year on year but revenue only increased by 10%. However, despite this the company did well on all fundamentals, with gross dollar volumes, processed transaction counts and worldwide purchase volumes all increasing at double digit rates.

Investors have been skeptical about bottom line growth for Master Card for some time. As consensus estimates for Master Card were pushed up marginally for the second quarter, the company’s share price declined by 7% from mid-April. Additional fears were stoked by CEO Ajay Banga selling off nearly half of his shares in the company. However, in this quarter, we expect most of these trends to continue, with fundamental performance remaining strong but a strong U.S. dollar continuing to weigh down revenue from international operations.

Longer term, the payments industry is becoming increasingly competitive. The main drivers of revenue growth are generally a race to the bottom with long term co-branding partnerships being secured at higher and higher prices with lower transaction prices and higher merchant discounts offered in exchange. Still, Master Card won a serious victory when it secured a deal with Jet Blue Airways, a long term partner of American Express. Additionally, new companies such as Square, Stripe and Dwolla are innovating fast and fast usurping niches opened up by the growth of e-commerce.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for MasterCard
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