High Gas Prices to Fill MasterCard’s Tank

April 28th, 2011 by Trefis Team
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A recent report by MasterCard (NYSE:MA) showed that the gasoline prices were up by 35% for the week ending April 22, compared to year-ago levels and high gasoline prices are having a limited impact on the U.S. consumer’s demand for fuel. Average U.S. demand for retail gasoline over the past four weeks fell by just 2% compared to the same period of 2010. [1]. The figures are estimates by MasterCard Advisors, based on aggregate sales in the MasterCard payments system coupled with estimates for other payment forms including cash and checks. MasterCard competes with Visa (NYSE:V), Discover Financial (NYSE:DFS) and American Express (NYSE:AXP).

We have a price estimate of $293 on MasterCard’s stock which is about 5-6% above the current market price.

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Gasoline demand and prices are important figures for MasterCard as gasoline is one of the most frequent items purchased on credit cards. MasterCard charges gas stations when they accept payments for fuel using MasterCard-branded cards and higher gasoline prices will result in higher fees charged by MasterCard.

Gasoline price and demand figures above indicate that prices are going up rapidly but demand is not falling as sharply as expected. One of the reason for this could be a lack of substitutes of gasoline available for retail consumers.

Thus, if we see continued higher gasoline prices in the future, the gross dollar value of credit card transaction will increase for MasterCard. This will increase the average authorization, settlement and switch fees per transaction charged by MasterCard. We estimate that MasterCard’s authorization, settlement and switch fee per transaction will decline to 7 cents from 2013 onwards, from its current level of 8 cents, due to high competition and regulatory changes.

However, stronger gasoline demand and prices could help maintain the current level of 8 cents per transaction and if maintained would add about 5% increase in our base price estimate for MasterCard.

See our full analysis of MasterCard.

Notes:
  1. UPDATE 1-US retail gasoline demand down 0.7 pct -MasterCard, Reuters, April 26, 2011 [↩]