MasterCard Continues On Growth Track, Remains Wary Of Near Term U.S. Prospects

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MasterCard (NYSE:MA) reported a net income of $879 million for the third quarter of 2013, up 14% from the prior year. [1] The card processing giant continued to benefit from a worldwide shift to plastic as it reported a 16% increase in processed transactions, with the gross dollar volume (GDV) of the transactions growing 14% (15% on a local currency basis). [2] Net revenue growth was 15%, consistent with the double-digit rate the company has maintained for the last few years.

However, like competitor Visa (NYSE:V), MasterCard maintained a cautious stance over U.S. volume growth. The management discussed a sharp decline in consumer confidence for the month of October, possibly due to recent events in Washington. A day earlier, Visa reported that the U.S. payment volume growth rate fell from 11% in August to 8% in September and was around 9% through the first three weeks of October. [3] MasterCard is less dependent on U.S. volume than Visa. Only 30% of MasterCard’s GDV comes from the country, compared to more than half for Visa.

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

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See Our Full Analysis for : Visa|MasterCard|American Express

MasterCard has maintained a market share of 10% of the PCE in the U.S., while Visa accounts for nearly a quarter of the spend in the country. [4] With electronic payment penetration breaching the 60% level in the U.S., these two can largely be considered as a barometer for consumer spending trends. A dip in consumer spending in the country will also affect American Express (NYSE:AXP) and Discover Financial (NYSE:DFS).

Consumer confidence has been rising for most of the year, buoyed by an improving job market which saw the unemployment rate reach a four year low of 7.2% in September. [5] The U.S. Commerce Department recently reported a five consecutive increase in monthly consumer spending of 0.5% in September. [6] However, government uncertainty regarding the budget might hamper sales during the holiday season. Industry group The Conference Board reported that its Consumer Confidence Index fell to 6-month low of 71.2, down sharply from 80.2 in October. [7]

We believe that MasterCard might be able to sustain growth even despite a short-term decline in U.S. sales. Further penetration into Asian economies will help the company, which currently generates close to 30% of its GDV from the Asia-Pacific region. MasterCard reported a 16% increase in the GDV from the geography, which was even higher – 22% – on a local currency basis. The growth rate was 11% in Latin America (17% on a local currency basis) helped by improved consumer confidence in Brazil. Emerging markets like India, China, Mexico, Brazil, Russia, Indonesia, South Africa and UAE generate combined PCE of around $10 trillion and have potential for expansion. Electronic payment penetration in these economies (except China, which is dominated by China UnionPay) is less than 28% of the PCE. [8] We expect MasterCard to capitalize on the potential in these markets.

The European Decision

European consumer confidence continued to improve for a second consecutive quarter, with MasterCard’s GDV from the continent  increasing 19% over the prior year. The figure for the first nine months of the year is 17% higher than last year. However, the European Commission’s rule to limit interchange fees charged from merchants by banks on the use of credit and debit cards might hamper growth in the coming years. [9]  The fees are generally set by card companies and collected by their financial clients, who issue the cards. The fees vary from around 0.2% of the value of transactions in the Netherlands to 1.5% in Poland.

Although MasterCard does not directly charge merchants or consumers, it charges assessment and transaction fees from its banking clients as a percentage of the billing currency (generally U.S. dollars) equivalent of transactions carried out by the institution using MasterCard products. Assessment fees account for around 35% of MasterCard’s revenues and more than 30% of the company’s GDV comes from the region. The commission has suggested a tentative timeline, before the Spring recess, for the adoption of the regulations, but we will update our model only after the implementation is officially announced.

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Notes:
  1. MasterCard Incorporated Form 8-K []
  2. Mastercard’s CEO Discusses Q3 2013 Results – Earnings Call Transcript []
  3. Visa’s CEO Discusses F4Q 2013 Results – Earnings Call Transcript []
  4. Personal Consumption Expenditures, U.S. Department of Commerce: Bureau of Economic Analysis []
  5. U.S. Department of Labor, Labor Force Statistics from the Current Population Survey []
  6. U.S. consumer spending gauge rises, but confidence weakens, Reuters []
  7. Consumer Confidence Decreases Sharply in October, The Conference Board []
  8. Visa investor meeting for 2013 []
  9. EU Plans Limit on Credit-Card Fees, Wall Street Journal, July 17, 2013 []