MasterCard Earnings Preview: Improving Consumer Trends Should Provide A Boost

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MasterCard (NYSE:MA) is expected to report earnings for the third quarter of 2013 on Thursday, October 31. [1] Following strong results from peers Discover Financial (NYSE:DFS) and American Express (NYSE:AXP) earlier this month, we expect MasterCard to benefit from improving consumer spending trends in the U.S. American Express, which accounts for 4% of personal consumption expenditures (PCE) in the U.S, reported an 8% year-on-year increase in card-member spending for the three months ending September, while Discover, which has a market share of 1%, observed a 3% increase in sales volume for the same period. MasterCard accounts for 10% of PCE in the U.S. and will look to maintain the double-digit revenue growth it has reported through the last four years.

Our $665 price estimate for MasterCard implies a discount of nearly 10% to the current market price.

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U.S. Trends Are Strong

The U.S. economy, particularly the job market, is recovering from the 2008 financial collapse. In September, the unemployment rate in the country dropped to 7.2%. [2] Data from the U.S. Commerce Department shows that consumer spending increased 0.3% in August, the fourth consecutive increase in monthly consumer spending as wages increased 0.4%. [3] Due to the high penetration of electronic payment systems in the U.S., we expect card processing companies like MasterCard and Visa (NYSE:V) to benefit from this trend. Electronic payments account for more than 60% of personal consumption expenditures in the country. [4]

Around 30% of MasterCard’s GDV comes from the U.S., and the company reported 6% volume growth for the second quarter of 2013. Credit volume increased 3% while its debit counterpart grew 9.5%. We expect the debit volume to slow down as the market adapts to the Dodd-Frank bill, which requires banks with more than $10 billion in assets to use separate payment processing networks for signature authorized and PIN authorized debit card transaction. [5] The new regulations allowed MasterCard to seize market share from Visa, whose logo is present on three out of every four debit cards in the country. Visa’s U.S. Debit volume fell 4% in the first three months of 2013 but increased 12% last quarter as the market adapted to the bill. Going forward, we expect the growth rate to normalize.

Continue To Focus On Emerging Markets

Nearly 30% of MasterCard’s gross dollar volume (GDV) comes from emerging markets in Asia, while another 8% comes from Latin America. The company reported a growth rate of 21% for payments volume from Asia last quarter, while GDV from Latin America increased 17% over the prior year. Emerging markets like India, China, Mexico, Brazil, Russia, Indonesia, South Africa and the UAE generate combined PCE of around $10 trillion and have relatively low electronic payment penetration, with paper-based transactions accounting for 62% of PCE (except in China, where the market is dominated by China UnionPay). [4] MasterCard is looking to capitalize on the market opportunity present there by establishing merchant and customer relationships. Last quarter, it reached an agreement with two of the largest banks in Korea for an increased share of their debit portfolio, and launched a gold-plated World Elite card in collaboration with Riyadh Bank in Saudi Arabia. We expect further growth from MasterCard in Asia and Latin America this quarter.

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Notes:
  1. Calendar of Future Events []
  2. U.S. Department of Labor, Labor Force Statistics from the Current Population Survey []
  3. Consumer Spending in U.S. Climbs 0.3% as Incomes Pick Up, Bloomberg []
  4. Visa investor meeting for 2013 [] []
  5. The Durbin Amendment Explained []