MasterCard Earnings Preview: U.S Economy Improves, FX Headwinds To Slow Growth

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MasterCard (NYSE:MA) is scheduled to report earnings for the fourth quarter and full year 2014 on Friday, January 30. [1] For the quarter ended September 30, the company reported a 13% year-over-year increase in net revenues to $2.5 billion due to an increase in gross dollar volume, cross border volume and transactions processed. We expect these drivers to have grown modestly in the last quarter as well, as the company focuses on expanding its digital payment platform globally. [2] Additionally, the announcement of a share repurchase program and an increase in the quarterly dividend will further accelerate the growth of MasterCard’ stock. [3]

Holiday spending and continued improvement in the U.S. economy will positively drive growth for the fourth quarter. However, revenues earned from the international market may take a hit due the strengthening of the U.S. dollar. Overall, we expect MasterCard to report modest growth in the fourth quarter. We have a price estimate of $83 for MasterCard’s stock, which is about in line with the current market price.

See Full Analysis for MasterCard here

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Improving U.S. Economy Aids Consumer Spending

MasterCard derives around 30% of its GDV from the U.S. However, cash penetration is around 54% of Personal Consumption Expenditures (PCE). This indicates that in the U.S., around 46% of consumer spending is made through a credit or debit card or online, which is the highest when compared to other regions such as Latin America, Asia and Europe, where cash penetration as a percentage of PCE is around 92%, 93% and 77% percent, respectively. [4] Therefore, the state of the U.S. economy is a significant factor for the company’s earnings. Over the past year there has been a considerable uptick in various economic indicators. The unemployment rate in December declined to 5.6%. [5] Real Disposable Personal Income increased by 0.5% in November compared to a 0.3% increase in October, while personal savings as a percentage of disposable personal income was 4.4% in November compared to 4.6% in October of the same year.  [6] The improving job market and a fall in gasoline prices spurred spending in the fourth quarter, which is defined by the holiday season. According to the National Retail Federation, holiday retail sales grew by 4% to $616.1 billion for November and December in the U.S., and online sales grew by 6.8% to $101.9 billion. [7]

FX Likely to Dampen Overall Growth

MasterCard is significantly affected by its performance in international markets, as more than 70% of its GDV comes from outside the U.S. In the fourth quarter, the U.S. dollar strengthened when compared to currencies in Asia Pacific and Europe, which each account for around 30% of GDV for MasterCard. The dollar index reached its highest point since March 2009 in the fourth quarter, as the yen reached a 7 year low and the Euro reached a two year low in December. [8] The weakening of major international currencies is likely to negatively affect revenues from international markets.

MasterCard has been focusing on growing its digital practices of late. With the launch of MasterPass in 2013 and the company’s partnership with Apple Pay, MasterCard is constantly making efforts to expand its digital network in the domestic and international market. [9] In the last quarter, MasterPass was launched in the Czech Republic, the UK, the UAE, France and Russia, and as of today, it is present in 16 countries around the globe. MasterCard is on track to tap into the Mobile Payment market by making it easier for consumers to make transactions.

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Notes:
  1. MasterCard Incorporated to Host Conference Call on Fourth-Quarter and Full-Year 2014 Financial Results, Press Release []
  2. MasterCard Incorporated Reports Third-Quarter 2014 Financial Results, Press Release []
  3. MasterCard Board of Directors Announces Increase in Quarterly Dividend and $3.75 Billion Class A Share Repurchase Program, Press Release []
  4. MasterCard Incorporated 2014 Investment Community Meeting, Press Release []
  5. Employment Situation Summary, Bureau of Labor Statistics []
  6. Personal Income and Outlays, Bureau of Economic Analysis []
  7. Retail Holiday Sales Increase 4 Percent, National Retail Federation []
  8. What the dollar may be saying about Europe, Market Insider []
  9. Celebrating a Digital Christmas with MasterPass in Europe, Press Release []