Investors Displeased By MasterCard’s Less-Than-Masterful Q4

MasterCard

Thanks to a sizable increase in costs, MasterCard (NYSE:MA) — the second-largest U.S. payment network after Visa (NYSE:V) — failed to beat Wall Street’s earnings expectation. After the company released its fourth-quarter on Monday before the markets opened, investors, who bid shares of MasterCard up 72.95 percent in 2013 — reacted to the bottom line miss by pushing shares down as much as 5.6 percent percent to $75.28. Shares opened at $75.51 and continued dropping in early trading Friday morning.

Wall Street analysts had predicted MasterCard to report earnings per share of 60 cents on $2.14 billion in revenue. However, operating expenses, excluding a one-time charge related to settling merchant litigation, rose 11 percent to $1.1 billion from $966 million a year earlier. Those expenses, which were driven by higher rebates and a 23 percent increase in payments to banking and retail clients signing new and renewal agreements, offset higher cardholder spending and crippled the company’s fourth-quarter results.

For the three month period, the Purchase, New York-based company reported that net income rose 3 percent to $623 million, or 52 cents per share, from $605, or 49 cents per share. Meanwhile, revenue climbed 12 percent to $2.13 billion, missing expectations slightly. The gain was propelled by a 13 percent jump  in processed transactions. In total, cardholders made $1.1 trillion in purchases on MasterCard cards, a 14 percent jump on a local-currency basis from the fourth-quarter of 2012. These results were adjusted for the 10-for-1 stock split MasterCard announced last year.

“The notorious lumpy rebate line was even higher-than-expected,” Jefferies Group analyst Jason Kupferberg wrote in a note to clients seen by Bloomberg. Still, the firm’s “initial look shows no reason for significant concern. We view the pullback as an especially good buying opportunity.”

Increased costs were not the only weight on MasterCard’s fourth-quarter. The company recorded a $61 million charge as a result of litigation filed by merchants that claimed MasterCard had inflated the transaction fees retailers pay each time a customer uses a credit card. In December, a federal judge approved a $5.7 billion settlement of a 2005 lawsuit that accused Visa and MasterCard of conspiring with banks to set transaction fees arbitrarily high. Excluding that charge, MasterCard would have earned 57 cents a share, a figure still below analysts expectations.

For 2013, MasterCard reported net income rose 15 percent to $3.2 billion, earnings per diluted share jumped 19 percent to $2.61, and revenue increased 13 percent to $8.3 billion.

Despite the displeasure of investors at the earnings miss, the company was “very pleased with our performance this quarter,” as MasterCard President and Chief Executive Officer Ajay Banga said in the earnings press release. Plus, “full-year 2013 results reflect the overall strength of our global business,” Banga added. He then cited several highlights for the past quarter. “In addition to signing several significant deals last quarter, we made new investments in processing and person-to person payments while expanding our MasterPass digital platform — all supporting safe and seamless payment experiences,” explained Banga.

In general, the steadily improving economy has helped boost earnings throughout the industry. On Thursday, Visa reported fiscal first-quarter profit rose 8.8 percent to $1.41 billion, an increase that beat Wall Street’s expectations; Discover Financial Services (NYSE:DFS) released fourth-quarter results on January 23 showing that net income jumped to $602 million due to greater credit-card spending and higher loan demand; American Express (NYSE:AXP), the largest issuer of credit cards by purchases, reported on January 17 that fourth-quarter profit doubled thanks to higher consumer spending.

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