MasterCard Q2 Earnings Preview: Improving Consumer Sentiment To Drive Growth

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MasterCard (NYSE:MA) is slated to report earnings for the second quarter of 2014 on Thursday, July 31. [1] The other two credit card majors, American Express (NYSE:AXP) and Visa (NYSE:V), reported growth of 7% and 11% year-over-year in net income, respectively. In the previous quarter MasterCard reported strong earnings with a 14% year-over-year rise in net income, on back of higher gross dollar volume (GDV) and processed transactions. [2] We expect the improving trends in consumer sentiment and rising disposable income levels to drive MasterCard’s performance for the second quarter.

We have a price estimate of $77 for MasterCard’s stock, which is about in line with the current market price.

See our complete analysis of MasterCard’s stock here

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Trends In The U.S. That Will Drive Performance

Almost 30% of MasterCard’s GDV comes from the U.S., where the company had around 343 million cards (26% of total cards) in force in the first quarter. The company has a high level of penetration in the U.S., accounting for nearly 10% of the personal consumption expenditures in the country. Nearly 60% of personal consumption expenditures (PCE) in the country are from non-cash transactions, suggesting that future growth is dependent on improving consumer sentiments rather than increased penetration. [3]

The unemployment data suggests improvement in the U.S. job market. According to the Bureau of Labor Statistics, the unemployment rate was 6.1% in June as the economy added 288,000 jobs during the month. [4] Over the past few months, the addition of over 200,000 jobs a month has also played an important role in uplifting consumer sentiment, especially after the slump witnessed during the severe winter conditions earlier this year. This growth in employment was driven by strong performance in the manufacturing and services industries. [5]

Data from the Bureau of Economic Analysis is also indicative of better consumer sentiment in the second quarter. For the month of May, personal consumption expenditures (PCE) increased 0.2% year-over-year to $18.3 billion, supported by a similar increase in disposable personal income by 0.4% year-over-year to $55.6 billion. This is a continuation of the trend in recent months, as DPI grew by 0.4% in April as well. [6]

Gauging MasterCard’s Expansion Outside Of The U.S.

Internationally, MasterCard’s key markets are divided  into the Asia Pacific, Middle-East and Africa region (APMEA) and Europe, which together contribute 30% of total company GDV. In the first quarter, APMEA GDV grew 19% on a local currency basis, but only 12.4% on a nominal reported basis compared to the previous year. Similarly, Europe GDV was up 14.7% on a local currency basis and 13.6% on a nominal reported basis. Due to the international nature of transactions that MasterCard processes, the risk of foreign currency fluctuations always remains a challenge to the company.

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Consumer spending, inventories seen lifting U.S. second-quarter GDP

Notes:
  1. Calendar of Future Events, MasterCard Investor Relations []
  2. Mastercard’s CEO Discusses Q1 2014 Results – Earnings Call Transcript []
  3. Visa Inc. Investor Day []
  4. Bureau of Labor Statistics []
  5. Consumer spending, inventories seen lifting U.S. second-quarter GDP, Reuters []
  6. Personal Income Outlays, Bureau of Economic Analysis []