MasterCard Maintains Growth Despite Severe Winter Conditions In The U.S., FX Headwinds In Asia
MasterCard (NYSE:MA) reported strong earnings for the first quarter of 2014 with net income climbing 14% over the prior year. Revenue increased 14% with a similar increase in gross dollar volume (GDV) and processed transactions. [1] These two metrics are for assessing the company’s performance as its primary sources of income are data processing fees and service fees charged from its financial clients who issue cards bearing the MasterCard logo. Data processing fees, or transaction fees, are charged for providing authorization, clearing, settlement, maintenance and network access services, and are charged as a percentage of the total transactions processed for a client. Service fees are charged on the basis of the gross dollar volume (GDV) of transactions processed for a client.
MasterCard’s main competitor, Visa (NYSE:V), also reported strong growth for the first quarter with net income increasing 26% over the prior year. However, unlike MasterCard, it failed to maintain revenue growth, which fell from 15% in the March quarter of 2013 to 7% in the current quarter.
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U.S. Retail Drops After Severe Winter, Other Sectors Pick Up
Around 30% of MasterCard’s GDV comes from the U.S., where the company has 343 million cards (26% of its total cards) in force. The company has a high level of penetration in the country, accounting for around 10% of the personal consumption expenditures in the country. [2] Visa is a bigger player in the mass market, accounting for over 20% of PCE and the company reported an 8.5% in the same for the March quarter. Both these companies were able to sustain growth despite a decline in retail sales growth rate. According to MasterCard’s SpendingPulse data, the growth rate fell from 3.9% in the December 2013 quarter to 2.8% in the March 2014 quarter. Increased spending in sectors like furnishings, airlines and lodging offset the decline in the retail sector.
Nearly 60% of personal consumption expenditures (PCE) in the country are from non-cash transactions, suggesting that future growth is more likely to come from improving consumer sentiment than increased penetration. [3] MasterCard recently announced an agreement with Wal-Mart (NYSE:WMT) and Sam’s Club whereby the two retail giants will convert their co-brand credit cards to MasterCard in the coming months. The company also has an agreement with Target, which will convert its Target branded credit cards to MasterCard in 2015. These are three of the biggest retail chains in the U.S. and the agreements will allow MasterCard to increase market share in the country.
International Prospects Remain Strong Despite FX Headwinds In Asia
Outside the U.S., MasterCard’s main geographies are the Asia Pacific, Middle East and Africa region (APMEA) and Europe, both of which account for 30% of the company’s total GDV. On a local currency basis, APMEA GDV grew 19% during the first quarter but the weakening of Asian currencies against the U.S. dollar meant that the growth rate on a nominal reported basis was just 12.4%. The growth rate in Europe was 13.6% on a reported basis and 14.7% on a constant currency basis.
Like the U.S., electronic payment penetration in Europe is quite high and future growth will be driven by the economic recovery in Western Europe rather than increased penetration. Russia accounts for just 2% of MasterCard’s revenue and geopolitical events in the region will not have a large impact on the company’s earnings.
The APMEA region, however, holds huge potential for expansion. Electronic Penetration in emerging markets like India, Indonesia, UAE and South Africa is quite low. 92% of India’s $1 trillion in PCE is through paper based media, [3] while India’s electronic penetration is just 15%. South Africa’s penetration stands at 35% on PCE of $150 million. MasterCard has just 433 million cards in force in APMEA which generate around $70 in GDV per card each quarter. In contrast, it has 334 million cards in Europe, which generate $93 in GDV per card each quarter. We expect MasterCard to continue its push for expansion in the coming years.
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- Mastercard’s CEO Discusses Q1 2014 Results – Earnings Call Transcript [↩]
- Personal Consumption Expenditures, U.S. Department of Commerce: Bureau of Economic Analysis [↩]
- Visa Inc. Investor Day [↩] [↩]