MasterCard Initiated as Neutral – Analyst Blog

We are initiating coverage on MasterCard Inc. (MA) with a Neutral recommendation. The company’s fourth-quarter earnings of $2.24 per share came in substantially below the Zacks Consensus Estimate due to higher operating expenses that skewed the bottom-line. However, top-line growth was helped by better pricing, an increased number of processed transactions and a lower tax rate.

 

MasterCard continues to drive growth through increased cross-border volumes along with a consistent growth of processed transactions. These signs are encouraging as they account for key revenue drivers of MasterCard’s business.

 

Moreover, the debit card business continues to pose modest growth amid the global challenging environment. The company is expected to retain this momentum once the global economy revives its historical highs.

 

Despite the economic turmoil that eroded the reserves of most of the organizations, MasterCard enjoys a strong cash and available-for-sale investment position along with strong retained earnings. This provides not only an operating leverage to the balance sheet but also acquisition opportunities as well as scope for debt reduction and capital expenditure enhancing long term growth.

 

However, MasterCard continues to face headwinds in maintaining the cost of operations of its vastly expanded business. While increased personnel costs due to severance-related charges are on an inclining trend, the company’s expenses on rebates, incentives, legal, interest and other non-operating expenses continue to weigh heavily on the bottom line. Going forward, additional non-operating expenses and legal claims along with increasing fixed overheads could saturate the bottom-line results.

 

Moreover, the deteriorating credit quality of the market amid the furor of the recent global crisis has adversely affected MasterCard’s credit gross dollar volume (GDV) growth. After increasing in 2008, GDV growth witnessed a decline in 2009.

 

Currency fluctuations along with higher rebates and incentives passed on to the customers and intermediaries also added to the woes. The recovery of GDV growth is critical for the company’s top-line growth as it is one of the principal revenue drivers for MasterCard.

 

Overall, MasterCard remains well positioned to grow its revenue and earnings despite the economic hangover. The company benefits from strong secular demand growth, meaningful international exposure, high barriers, excellent pricing power and impressive operating leverage.

 

While the debit card business remains strong globally, the credit card growth remains tepid given the current credit market deterioration, increasing regulatory compliances and increased interest costs. We expect earnings growth to gain momentum once the economy recovers.