MasterCard Earnings: Higher Gross Dollar Volume And Transactions Boost Income

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MasterCard (NYSE:MA) recently reported earnings for the second quarter of 2014, with a 10% year-over-year increase in net income. Revenue in the second quarter was $2.4 billion, up 13% year-over-year, largely driven by a rise in gross dollar volume (GDV) and cross-border transaction volume. [1] We expect growing partnerships as well as an improving economic environment to further boost growth for MasterCard in the second half of 2014.

Total operating expenses saw an increase of 15% on a local currency basis, mostly due to increased investments in strategic initiatives as well as acquisitions. The simultaneous increase in operating income by 13% year-over-year led to an operating margin of 58.2% 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.

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Increase in Gross Dollar Volume And Processed Transactions

MasterCard’s primary source of income is the fees charged on data processing and the service fees that it charges from its financial clients who issue cards bearing the MasterCard logo. MasterCard charges a data processing fee which is calculated as a percentage of the total transactions processed for a client for providing authorization, clearing, settlement, maintenance and network access services. Service fees are charged on the basis of the gross dollar volume (GDV) of transactions processed for a client. Global GDV grew 13%, while the U.S. GDV grew 9% during the second quarter on a local currency basis.

Global processed transactions also increased by 12% in the second quarter to 10.6 billion. Additionally, the total number of cards went up by 8%, crossing the 2 billion mark for both MasterCard and Maestro brands combined.

Trends Driving Growth

MasterCard, owing to its global operations being spread across more than 210 countries and territories, is affected by dynamic trends in economic growth, consumer spending, travel and retail sales as well as the level of acceptance of its cards by merchants and financial institutions. The U.S. forms the biggest chunk of the company’s business, contributing over 30% of the total GDV, while regions such as Asia-Pacific and the Middle East provide significant growth potential.

Improving Economic Conditions Across The Globe

Due to a high level of penetration in the U.S., where MasterCard accounts for around 10% of personal consumption expenditures (PCE), the prevailing consumer sentiment largely determines growth. [2] According to the first advance estimates released by the Bureau of Economic Analysis, U.S. GDP expanded by 4% in the second quarter, as compared to a 2.1% contraction during the first quarter. [3] According to the latest data, consumer sentiment in the U.S. may also be bouncing back, and according to MasterCard’s SpendingPulse report estimates, U.S. retail sales (excluding auto) grew by 3.8% compared to 2.3% growth in the first quarter. [4]

Asia-Pacific is a high growth potential market for MasterCard, owing to low levels of credit card penetration in many countries. Improvements in business growth and consumer sentiment in the region contributed a 30% increase in the number of transactions processed. In the second quarter, MasterCard registered a resounding growth of 17.8% on local currency basis in GDV across the Asia-Pacific, Middle-East and Africa (APMEA) region. We expect the region to continue to fuel solid growth in the coming years. The World Bank forecasts a 5.3-6.3% growth in GDP for the South-Asian region, while the Middle-East is expected to see a 2-3.5% GDP growth rate in the 2014-16 period. [5]

New Deals Likely To Bolster Future Growth

MasterCard entered into a slew of new partnerships as part of its strategy to increase the number of merchants and brand associations. In the previous quarter, MasterCard announced partnerships with Wal-Mart (NYSE:WMT), Sam’s Club and Target. The company also entered an agreement with BJ’s Wholesale Club to convert their credit card business to MasterCard’s chip-enabled cards. The partnership will come into effect in the spring of 2015.

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Notes:
  1. MasterCard Incorporated Reports Second-Quarter 2014 Financial Results, Investor Relations []
  2. Personal Consumption Expenditures, U.S. Department of Commerce: Bureau of Economic Analysis []
  3. Bureau of Economic Analysis []
  4. MasterCard (MA) CEO Ajay Banga on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha []
  5. []