Is MasterCard’s Stock a Buy with Consumer Confidence Increasing?

With shares of MasterCard (NYSE:MA) trading just above $460 per share Tuesday afternoon, is MA a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement:

For the first time in history, MasterCard debit transactions exceeded Visa credit card transactions last quarter. With processed transactions up 24 percent over the year-ago quarter and increased consumer spending, the United States’ second largest payments network reported third-quarter income Wednesday that beat analysts estimates.

Rebates and incentives, which encourage banks to work with MasterCard, rose 20 percent over the quarter and contributed to the increased number of processed transactions. However, these same increases trimmed margins.

For the three months ended in September, MasterCard reported that net income climbed 7.7 percent to $772 million, or $6.17 per share. The quarter’s results not only beat analysts expectations by 25 cents but improved year-over-year. In the year-ago quarter, the company posted net income of $717 million, or $5.63 per share. Comparatively, net revenue increased by 6 percent for the quarter to $1.92 billion, missing analysts’ expectations of $1.94 billion. The revenue results were held back by a 5 percent increase in operating expenses.

In the United States, where MasterCard earns 40 percent of its revenue, the company’s third quarter earnings were affected by two key drivers: a change in federal regulations and an improvement in consumer confidence.

The Durbin amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama in 2010, required banks with more than $10 billion in assets to use separate payment processing networks for signature authorized and PIN authorized debit card transactions. As a result, debit card transactions processed by Visa (NYSE:V) decreased by 3 percent, while MasterCard’s transactions increased by 17 percent. The new rule eroded Visa’s dominance over the debit-card market and allowed MasterCard to increase its market share to 27 percent.

Credit-card purchases rose 3.2 percent in the United States during the third quarter and debit-card spending increased by 13 percent. The company’s CEO, Ajaypal S. Banga, attributed the consumer-spending growth to an improvement in consumer confidence. In October, U.S. consumer confidence reached its highest level in five years. However, he noted that growth was slower this quarter than in 2011 and the first half of 2012.

“Our U.S. consumers, however, appear to be holding to their budgets with pretty tight and close controls on what they’re spending on,” said Banga in the company’s earnings conference call. “We are seeing a rotation in their spending from sector-to-sector based mostly on their seasonal needs.”

Globally, purchases made by credit-card increased 11 percent over the three-month period, while debit card purchases rose 15 percent. The company cited emerging markets and foreign governments as driving the growth. Seeking Alpha estimated in a recent article that the potential for growth outside the United States is immense. According to Visa, more than 30 percent of consumer spending worldwide is conducted through cash and checks. Furthermore, penetration is quite low in the industry’s biggest market, China. MasterCard has calculated that card spending in the country will increase from $1 trillion to $2.5 trillion by 2025. However, the Chinese Government has, for the most part, enabled the state-owned domestic supplier, China UnionPay, to maintain a monopoly by requiring every merchant and ATM to accept UnionPay cards. If this practice continues, MasterCard could potentially lose its rank as the second-biggest payments network to the Shanghai-based company.

However, analysts, including Tien-tsin Huang of JPMorgan Chase, are questioning the quality of MasterCard’s results, stating that the company beat estimates only because of a change in tax rate. Last year, the effective tax rate fell to 27.6 percent from 30.5 percent because of “export incentives.”

“We actually looked very critically in terms of how we do our calculations” for an export-related tax rate, said MasterCard Chief Financial Officer Martina Hund-Mejean in a phone interview with Bloomberg. “We did not take advantage of this regulation as much as we should have.”

Following MasterCard’s earnings report, shares increased 1.2 percent to $458.26 at 12:55 p.m. in New York. The company’s stock has gained 22 percent this year through October 26, in comparison with the 13 percent gain posted by the 70-company Standard & Poor’s 500 Information Technology Index.

T = Trends Support the Industry in which the Company Operates:

Several problems haunt U.S. payments networks.

Due to an agreement made in July, MasterCard, Visa, and several major banks, including JPMorgan Chase (NYSE:JPM), are required to pay more than $6 billion to settle accusations that they engaged in anti-competitive practices in payment processing. MasterCard has said that is share could cost the company as much as $790 million, while Visa’s share could amount to $4.4 billion. However, the settlement of the proposed class-action lawsuit has not been formally approved.

Additionally, UnionPay’s share of the combined credit- and debit-card purchase volume rose in the first half of 2012 from 21 percent to 25 percent. Consequently, according to the Nilson Report, Visa’s share declined to 46 percent from 49 percent, MasterCard’s climbed to 22 percent from 21 percent, and American Express’ (NYSE:AXP) fell to 7.2 percent from 7.5 percent. But UnionPay’s business practices have been questioned; the World Trade Organization decided in July that China’s tight control over credit- and debit-card transactions discriminated against U.S. payment networks, providing the card companies with increased access to China’s payments market.


Ahead of MasterCard’s third-quarter report, 22 analysts had rated the stock a buy, one rated it a sell, and six rated the stock a hold, signaling of a bullish stance by analysts. Following the company’s earnings release, Janney Capital Markets analyst Thomas C. McCrohan wrote in a research note that MasterCard “remains on track to achieve its +20% EPS growth objective this year.” Furthermore, the ruling by the WTO has helped to pave the way for MasterCard’s business to expand in China and debit-card spending grew dramatically in the United States. However, Banga noted in the conference call that the company’s growth in the second quarter was not nearly as strong as in the first half of the year.

While the ruling by the WTO paved the way for MasterCard’s business to expand in China and consumer confidence improved over the quarter, Banga noted that the company’s growth in the second quarter was not nearly as strong as in the first half of the year. Because of this, and the key metrics above MasterCard looks like a WAIT AND SEE.

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