Will The Recovery In Retail Sales Help Mastercard Beat Expectations In Q1?

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Mastercard (NYSE:MA) is scheduled to release its first quarter results on April 30. The company has consistently beaten street estimates over the past four quarters, and we expect this winning streak to continue this quarter as the recovery in retail sales activity is likely to have boosted the company’s top line for the quarter. Our price estimate for Mastercard stands at $238 per share, which is slightly below the market price. You can view our interactive dashboard How Has Mastercard Fared In Recent Quarters? to observe the quarterly revenue and expense trends, and to understand how changes to them impact the company’s stock price. Additionally, you can find more Financial Services Data here.

Mastercard earns its revenues from transaction processing, domestic assessments, international transactions, and other value-added services. Gross dollar volume (GDV) and purchase volume are key drivers of the company’s revenues, and are largely dependent on macroeconomic factors such as GDP growth, retail sales, consumer confidence and more. Below we take a closer look at retail sales trends and GDP growth number across its three major geographies: the United States, Europe, and Asia-Pacific Middle East and Africa, which together account for 90% of the GDV.

United States

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After a sharp 1.6% drop in retail and food services sales last December and a notable decline in investor sentiment due to the expectation of further rate hikes, the U.S. equity market has gained almost 20% since the beginning of the year. January and February retail sales figures came in at $507 billion and $506 billion – increases of 0.77% and 0.56%, respectively, over the December figures. Retail sales for March are expected to grow by 1.6% sequentially to $514 billion (per US Census Bureau, seasonally adjusted retail sales data considered). Also, The World Economic Outlook has lowered its world GDP growth forecasts for 2019 earlier this month, with the United States expected to grow by 2.3% this year. This compares with U.S. GDP growth rate of 2.20% and 2.90% in 2017 and 2018, respectively (per IMF). During this period, retail sales growth was 4.74% and 4.90%, respectively.

While retail sales growth slowed down during the early part of the year, we believe that an economic recovery is underway. Because of this, we expect Mastercard’s U.S. GDV to grow by 2-3% sequentially to around $480 billion this quarter.

Europe

Per recent data released by Eurostat, the total retail trade in 28 E.U. member countries increased by 1% in January and 0.4% in February, sequentially. The IMF has cut the annual growth forecast for the Euro area from 1.60% to 1.30% earlier this month, considering Brexit uncertainty and the U.S.-China trade dispute. As Europe’s retail sales growth figures look slightly better than that for the U.S., and as Mastercard’s Europe GDV growth figures have historically been higher than that for the U.S., we expect Masteracard’s Europe GDV to increase sequentially by 5-6% to around $490 billion.

Asia Pacific

Emerging markets and developing economies have been a cornerstone to world GDP growth over the last decade. Per Mastercard’s Asia Pacific Consumer Retail Barometer, retail sales growth was positive for China, Australia, and ASEAN countries during January and February. Sales growth was also positive for all countries in March except India, where recovery is underway. Mastercard reports Asia’s figures under its APMEA segment, which has been observing mid-teens growth over the last few quarters. Considering the strong growth potential of the region, we expect APMEA GDV to grow by a brisk 13-15% to reach $506 billion in Q1 2019.

What This Means For Mastercard’s Q1 Revenues

Considering a net revenue to GDV ratio of 0.25% (calculated by taking an average of last four quarters) and using our estimated Total GDV figure of $1,575 billion, we expect Mastercard’s net revenues to grow by 4% sequentially to around $3.96 billion this quarter. For reference, Mastercard’s GDV for the last four quarters were, 18’Q1: $1,407 billion, 18’Q2: $1,475 billion, 18’Q3: $1,469 billion, 18’Q4: $1,550 billion.

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