MasterCard Inc.‘s (MA) fourth-quarter 2011 operating earnings per share of $4.03 came in drastically ahead of the Zacks Consensus Estimate of $3.90 and $3.16 in the year-ago quarter. Net income for the reported quarter stood at $515 million, spiking 23.7% from $415 million in the prior-year quarter.
However, including an after-tax charge of $495 million ($770 million, pre-tax) related to the U.S. merchant litigations, MasterCard reported net income of $19 million or 15 cents per share during the reported quarter. No such special items were recorded in the year-ago period.
Results for the reported quarter improved over the prior-year quarter primarily due to better pricing, an increased number of processed transactions and strong gross dollar value (GDV) growth. However, a higher lower tax rate and operating expenses along with the merchant litigation expense were the downsides.
Total revenue surged 20.2% year over year to $1.73 billion, also slightly beating the Zacks Consensus Estimate of $1.72 billion. On a constant currency basis, net revenue increased 20.8%, while excluding acquisitions, net revenue grew about 18.0%. The upside was primarily due to a 23.2% growth in the number of processed transactions to 7.7 billion along with a 17.5% increase in cross-border volumes.
During the reported quarter, GDV increased 16.3% to $863 billion while worldwide purchase volume climbed 15.2% year over year, on a constant currency basis, to $648 billion. As of December 31, 2011, MasterCard issued 1.8 billion MasterCard-and Maestro-branded cards.
Total operating expenses increased 100.1% year over year to $1.74 billion. Currency fluctuations had minimal impact on operating expenses. The overall increase primarily resulted from a $770 million (pre-tax) of provision for litigation settlement along with a 14.3% increase in general and administrative expenses. While advertising and marketing expenses climbed 4.8%, depreciation and amortization expenses grew 23.8% from the year-ago quarter.
Besides, excluding merchant litigation expense, total operating expenses increased 11.5% over the prior-year quarter, while operating income escalated 33.5% in the reported quarter. However, operating margin rose 44.0%, modestly up from 39.6% in the year-ago quarter.
MasterCard’s effective tax rate for the reported quarter was 32.3%, modestly higher than 28.7% in the year-ago period, primarily attributable to a benefit recorded in the year-ago quarter, partially offset by a favourable geographic mix of earnings in 2011.
Full-Year 2011 Highlights
For full-year 2011, MasterCard recorded operating net income of $2.4 billion or $18.70 per share as compared with $1.85 billion or $14.05 per share in 2010. Operating earnings per share also exceeded the Zacks Consensus Estimate of $18.57 per share. However, including the charge related to the U.S. merchant litigations in the reported quarter, reported net income stood at $1.9 billion or $14.85 per share.
Total revenue surged 21.2% year over year to $6.71 billion, in line with the Zacks Consensus Estimate, while excluding acquisitions, net revenue grew about 19%. Excluding acquisition and merchant litigation-related expense, total operating expenses increased 10.0% over 2010.
Operating income increased 26.6% over 2010, while operating margin rose 51.9%, modestly up from 49.7% in the 2010. Effective tax rate stood at 31.8% in 2011 against 33.0% in 2010.
As of December 31, 2011, MasterCard’s net operating cash flow grew to $2.7 billion, up from $1.7 billion as of December 31, 2010. At the end of 2011, cash and cash equivalents increased to $3.73 billion from $3.07 billion at the end of 2010 while the long term-debt was nil.
Meanwhile, retained earnings increased to $4.75 billion in 2011 from $2.92 billion at the end of 2010. Total equity grew to $5.88 billion from $5.22 billion as of December 31, 2010.
Share Repurchase Update
During the reported quarter, MasterCard repurchased about 84,300 million shares for $30 million. The company bought back 4.4 million shares for about $1.1 billion in 2011. Until January-end, MasterCard has already bought about an additional 304,600 shares for approximately $106 million since the fourth quarter of 2011.
On April 12, 2011, MasterCard approved and authorized the extension of its stock repurchase program to $2 billion from $1 billion. To date, about $746 million of stock remains available under the current repurchase program authorization.
Dividend Update
On December 6, 2011, the board of MasterCard announced a quarterly cash dividend of 15 cents per share to shareholders of its Class A common stock and Class B common stock. The dividend will be payable on February 9, 2012 to the respective shareholders of record as on January 9, 2012.
On November 9, 2011, MasterCard paid its quarterly cash dividend of 15 cents per share to shareholders of its equity classes of record as on October 10, 2011.
Our Take
MasterCard benefits from strong secular demand growth, meaningful international exposure, diversified product portfolio, high barriers, excellent pricing power, risk-free balance sheet and impressive operating leverage. Also, the above-average earnings growth, strong competitive position and leverage to an eventual economic recovery will result in a relative valuation premium.
However, we are concerned about MasterCard’s resilience and ability to raise prices, increased operating expenses, the detrimental effects of the Consumer Protection Act in the U.S. and scope for increasing cash flow. Hence, the cautious outlook over the near term justifies our Neutral recommendation.
Besides, MasterCard’s prime peer, Visa Inc. (V) is slated to report is fiscal first quarter 2012 (ended December 31, 2011) financial results after the market closes on February 8, 2012.
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