MasterCard Q3 Earnings: Volume Growth Remains Strong Despite Macro And Competitive Pressures
Last week, MasterCard (NYSE:MA) announced its earnings for the quarter ended September. [1]. Despite global growth concerns and a challenging competitive environment, the company delivered earnings per share of $0.86 (including a $0.05 negative impact of special items), versus a consensus estimate of $0.88 [2]. MasterCard was able to achieve low double-digit growth rates in transaction volumes across markets (adjusted for currency fluctuations), with international markets performing slightly better than the US. In addition to revenue momentum, cost control and share repurchases helped the company grow earnings per share by 11% year-over-year on a currency-adjusted basis.
While current revenue and earnings growth rates remain in line with the company’s expectations, continued uncertainties in global markets and regulatory pressures (like in China) will likely keep investors on edge. Below we take a closer look at a few factors that are likely to have an impact on MasterCard’s business in the long term.
Our price estimate of $96 for MasterCard’s stock is about in line with the current market price. We are in the process of updating our model for the Q3 earnings release.
See our complete analysis of AmEx’s stock here
Tough Competitive Environment
This year has seen heightened competition in the credit card space as merchants aggressively bargain for lower fees. For example, in February this year, Costco (NASDAQ:COST) decided to end its 16-year partnership with American Express (NYSE:AXP) which was unwilling to compromise on fee rates. Reportedly, Costco was able to negotiate an near-zero fee contract with Visa (NYSE:V)((Bloomberg)), compared to the 0.6% it paid American Express on each transaction.
In another such deal (also in February), MasterCard won a contract from JetBlue Airways, which was another American Express customer. This was a valuable win for MasterCard as partnerships with airliners usually come with annual fees and generate additional spending as customers redeem reward points.
More recently (last week), however, MasterCard was on the losing side when it lost a longtime customer and its biggest debit card issuer, USAA [3]. This is a major loss for MasterCard because USAA brought in $26 billion in purchase volumes last year. Commenting on the issue, the company said “the economics did not make sense”, likely indicating the financial terms or fee rates that USAA would have demanded. If such pressure from merchants continues in the long-term, credit card companies will likely see a contraction in the fee rates that they charge per transaction.
Increased Spending On Acquisitions Will Weigh On Margins
MasterCard has ramped up investments in acquisitions to maintain its share of the payments market. In 2015, it estimates total investments to reach $1.5 billion, with a majority going into acquisitions. While the acquisitions will help drive top line growth, it will come at the cost of higher operating costs and lower margins. The effects are already reflecting in the company’s guidance for the full year. Compared to a 2 percentage point contribution to revenue growth, acquisitions are expected to lead to a 7 percentage point increase in operating costs, and will have a net negative impact on earnings.
Despite these investments and competitive pressures, MasterCard expects to maintain operating margins of at least 50% over the next 3 years, though they could decline slightly from the 2014 levels of about 54%. Adding in the benefits of share repurchases, earnings per share growth is expected to be in the mid-teens range excluding the effects of currency fluctuations and future acquisitions.
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Chart Source: MasterCard Investment Community Meeting
Other Sources: Seeking Alpha Earnings Transcript
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