Expecting Steady Growth In MasterCard’s Earnings

MasterCard (NYSE:MA) is expected to report earnings for the fourth quarter of 2012 on Thursday, January 31. The card processing company reported 10% growth in revenues through the first nine months of the year, registering growth across segments. We expect the card processing giant to have maintained this momentum through the fourth quarter.

MasterCard earns revenues by charging assessment fees based on payments volume and data processing fees (which include clearing, settlement and transaction processing fees) based on the number of transactions processed for a client (banks issuing MasterCard’s debit and credit cards). Assessment fees account for 36% of the company’s $8 billion revenues whereas transaction fees account for another 30%.

Our price estimate of $540 for MasterCard’s stock is in-line with the current market price. Please read our article: MasterCard’s Business Overview (Part 1): Assessment And Transaction Fee Income for a detailed analysis of MasterCard’s business operations.

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Debit Boost

Debit card transactions account for almost two-thirds of total cashless transactions in the U.S., and the U.S. accounts for 40% of MasterCard’s revenues. MasterCard’s debit and prepaid transactions processed increased by 15% in the first nine months of 2012, helped by the implementation of the Durbin amendment to the Dodd-Frank bill. The bill requires banks with more than $10 billion in assets to use separate payment processing networks for signature authorized and PIN authorized debit card transactions. ^[1] This helped MasterCard take away market share from its main competitor, Visa (NYSE:V), leading to an 11% increase in total transactions. ^[2]

Gross Dollar Volumes

Although debit card transactions are almost double the number of credit card transactions in the U.S., spending is much higher on credit cards. In the first nine months of 2012, the dollar volume of debit card transactions in the U.S. was $1.1 trillion whereas that of credit card transactions was $1.6 trillion. MasterCard reported a 10% increase in gross dollar volumes during the period driven primarily by debit cards, which increased by 15%. But, as credit cards account for a higher percentage of gross dollar volumes, we expect the long-term growth rate to be lower than that for transaction volumes.

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1. The Durbin Amendment Explained [↩]
2. The Nilson report, November 2012 [↩]