MasterCard Reports Solid First Quarter Despite FX Headwinds
MasterCard (NYSE:MA) reported strong results for the first quarter on Wednesday, April 29. Net income for the quarter was about $1 billion, a 24% year-over-year increase on a constant currency basis, which led to a 22% increase in the earnings per share to $0.89. Net revenue was $2.23 billion, an 8% year over year increase that was fueled by a 19% increase in cross-border volumes, a 12% increase in gross dollar volume (GDV) and a 12% increase in transactions processed. [1] Growth in the last quarter was affected by currency fluctuations as the dollar continued to strengthen against major currencies such as the Euro and Real. On the cost side, after a surge in operating expenses in the Q4 2014 due to restructuring charges, the company’s expenses increased by a moderate 3% this quarter to $879 million. MasterCard also drastically reduced its effective tax rate from 32% in the first quarter of 2014 to 23.9% this quarter as it continued to expand its international operations and take advantage of foreign tax benefits.
The company’s guidance for 2013-2015 has remained consistent since the previous earnings call, with revenue to grow at a CAGR of 11% to 14% and EPS to grow at a CAGR of around 20% for the three-year period, while maintaining an operating margin of at least 50%. [2]
We have a price estimate of $83 for MasterCard’s stock, which is slightly below the current market price.
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U.S Economy Continues To Drive Spending
Within the U.S., GDV grew by 7% year over year to $339 billion, although it decreased by 1% when compared to Q4 2014. According to MasterCard’s SpendingPulse data, U.S. retail sales (excluding auto but including gas) growth was 1.1% this quarter, down by 1.8% from the previous quarter. The decrease was attributed to falling gas prices. However, excluding auto and gas, retail sales in the U.S. grew by 5.1% this quarter compared to 4.1% in the previous quarter. ((Personal Saving Rate, FRED Economic Data))
International Market Affected by FX Headwinds
MasterCard derives around 70% of its Gross Dollar Volume from the international market. The company’s GDV outside of the U.S. grew by 15% on a local currency basis. FX headwinds, however, dampened the growth in U.S. dollars, which saw a decrease of 0.3% year over year. Increased spending in Turkey, Sweden and Canada primarily drove the growth in GDV.
Europe, representing almost one fourth of the total GDV, has been showing considerable signs of economic recovery. SpendingPulse data for the U.K. showed growth in retail sales of 3.8% in the last quarter, compared to 3.6% in the previous quarter, while the GDV for the European region grew by 15% on a local currency basis. However, when reported in U.S. dollars, it declined by 8.4% from the first quarter of the previous year, largely due to the weakening of the Euro to the U.S. Dollar.
Asia Pacific, which accounts for around 30% of GDV, showed positive momentum, as GDV increased year-over-year by 15%. However, FX headwinds dampened the growth in U.S. Dollars to 8.8%. We expect that currency fluctuations will continue to impact earnings.
Strategic Alliances To Impact Future Earnings
There were significant developments in the last quarter that have the potential to impact MasterCard’s earnings in the near future. During the quarter, the company entered into a 10-year agreement with Citi, whereby the latter will move a part of its consumer business-proprietary consumer credit and debit card portfolio to MasterCard in the U.S.
Similarly, the company entered into a 20-year agreement with Itaú Brazil, which will expand MasterCard’s reach in the Latin American region as Itau will issue credit, debit and prepaid cards that run on MasterCard’s network.
In the last quarter, the number of cards (MasterCard or Maestro branded cards) grew by 8% year over year to 2.2 billion. With these strategic alliances, we can expect the number of cards to continue growing in the future.
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