MasterCard’s Earnings Miss Estimates, Stock Is Fairly Valued

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Mastercard

MasterCard’s (NYSE:MA) shares fell 5% on Friday as the company’s earnings for the fourth quarter of 2013 missed market expectations. MasterCard reported net income of $623 million, or $0.52 per share, lower than expectations of $0.60 per share. [1] Excluding an after-tax expense of $61 million related to merchant litigations in the U.S., net income was $684 million or $0.57 per share, up 13% over the prior year but still below expectations. Currency fluctuations, particularly in Asia, affected the card giant’s earnings; gross dollar volume (GDV) growth in the APMEA region was 20% on a local currency basis but just 14% on a nominal basis. A quarter of MasterCard’s GDV comes from this region. Without FX adjustments, the bottom-line growth would have been 15%.

Net revenue growth of 11% was offset by a 23% increase in rebates and incentives, as the company signed new agreements to expand its business. Some of these agreements were done keeping an eye on the number of transactions processed. MasterCard charges an authorization, settlement and clearing fee of around $0.08 per transaction and a connectivity fee around $0.015 per transaction, and these fees are independent of the GDV of the transaction. For the December quarter, the company’s processed transactions increased 13% to 10.4 billion.

Our $75 price estimate for MasterCard is in line with the current market price.

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See Our Full Analysis for : Visa|MasterCard

U.S. Growth

U.S. GDV growth came down from 9% during the September quarter to 7%, with a 9% increase in debit volumes and a 3% increase in credit. MasterCard’s competitor, Visa (NYSE:V), also reported a 2% slowdown in growth in the U.S., despite a 3.8% increase in holiday season retail sales that allowed American Express (NYSE:AXP) to maintain a 9% growth rate in card-member spending. [2] This may have been partially due to adverse weather conditions in the country, which led to 15% decline in customer traffic through November and December. [3]

Unlike many fast-growing emerging economies, future growth in the U.S. is dependent on consumer sentiments. More than 60% of personal consumption expenditures (PCE) in the country are through non-cash transactions, indicating a high level of electronic payment penetration. [4] Recent figures released by the U.S. Department of Commerce show that Americans are now more inclined to spend; personal saving as a percentage of disposable personal income has gone down from 6.6% in the fourth quarter of 2012 to 4.9%. [5] Economic improvements in the country saw the unemployment level fall below 7% in December while wages and salaries increased 4% over the prior year. [6]  These trends indicate that consumer spend is likely to increase in the coming years. MasterCard has around 337 million cards in the country and accounts for 10% of the PCE. [7] During the December quarter, the company completed an agreement with Chase for its U.S. commercial card portfolio and extended its partnership with Citi. We believe that it can sustain a growth rate of 7% to 8% in the coming years.

International Prospects

More than 70% of MasterCard’s GDV comes from outside the U.S. and the company is more exposed to international currency fluctuations than Visa, which gets more than half of its GDV from the U.S. This was evident in the last quarter’s results; international GDV growth was 17% on a local currency basis, but just 14% when converted to U.S. dollars. The company was able to gain from a strengthened Euro, as GDV grew 14% over the prior year on a local currency basis, but 15% on a nominal basis. Europe accounts for a quarter of MasterCard’s GDV. The European Commission, the European Union’s antitrust regulator is planning to limit interchange fees charged from merchants by banks on the use of credit and debit cards. [8] The fees are generally set by card companies such as Visa and MasterCard and vary from around 0.2% of the value of transactions in the Netherlands to 1.5% in Poland. However, the legislation is yet to be adopted and the process can take some time to unfurl.

During the conference call, management suggested that an economic slowdown in China might have a big impact on growth in the Asia-Pacific region, particularly Australia, which relies a great deal on exports to China. However, we believe that the company can still maintain growth through increased penetration in emerging markets such as India, Mexico, Brazil, Russia, Indonesia, South Africa and UAE. Electronic payment penetration is still below 60% in these countries and PCE growth rate has been around 10% for the last four years.  MasterCard is also looking to expand in Africa and has signed an agreement with Ecobank, the largest pan-African bank to issue its branded debit, credit and pre-paid cards. The bank operates in 23 countries and serves 65% of the African populace.

Transaction Growth

Apart from GDV, MasterCard is also looking for transaction growth. During the fourth quarter, the company completed the acquisition of Provus, a provider of issuer and acquirer processing in Turkey. MasterCard also announced a joint venture with Belgian Telecom Company, BICS, and mobile money solutions provider, eServGlobal. The venture will provide money transfer services in 50 countries. We will discuss MasterCard’s transaction growth prospects in a subsequent article.

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Notes:
  1. MasterCard Incorporated Management Discusses Q4 2013 Results – Earnings Call Transcript []
  2. Holiday Retail Sales Come in at NRF Expectations, Press Release, January 14, 2014 []
  3. U.S. Holiday Sales Gain Is Smallest Since 2009, ShopperTrak Says, Bloomberg, January 8, 2014 []
  4. investor meeting for 2013 []
  5. Table 2.1. Personal Income and Its Disposition (A) (Q) []
  6. U.S. Department of Labor, Labor Force Statistics from the Current Population Survey []
  7. Personal Consumption Expenditures, U.S. Department of Commerce: Bureau of Economic Analysis []
  8. EU Plans Limit on Credit-Card Fees, Wall Street Journal, July 17, 2013 []