MasterCard Inc.’s (MA) fourth quarter operating earnings per share of $3.16 came in substantially ahead of the Zacks Consensus Estimate of $3.05 and $2.24 in the year-ago quarter. Net income for the reported quarter was $415 million, dramatically up 41.2% from $294 million in the prior-year quarter.
Results for the reported quarter improved over the prior-year quarter primarily due to better pricing, an increased number of processed transactions, strong gross dollar value (GDV) growth and a lower tax rate that also drove the operating margin. However, increase in rebates and incentives and slightly higher operating expenses were the downside.
Total revenue increased 10.7% year over year to $1.44 billion, also above the Zacks Consensus Estimate of $1.42 billion. On a constant currency basis, net revenue increased 13.0% over the prior-year period. The increase was primarily due to favourable pricing changes of 5%, a 6.3% growth in the number of processed transactions to 6.2 billion and an 18.7% increase in cross-border volumes.
GDV increased 11.0% to $752 billion while worldwide purchase volume climbed 10.8% year over year to $567 billion, during the reported quarter. As of December 31, 2010, MasterCard issued 1.6 billion MasterCard and Maestro-branded cards.
Total operating expenses increased 4.6% year over year to $869 million. Currency fluctuation contributed 1.5 percentage points to the increase in the expenses. The overall increase was primarily attributable to a 2.3% increase in general and administrative expenses.
While advertising and marketing expenses increased 6.8%, depreciation and amortization expenses grew 10.5% from year-ago quarter. However, operating margin came in at 39.6%, up from 36.0% in the year-ago quarter.
MasterCard’s effective tax rate for the reported quarter was 28.7%, modestly lower than 35.8% in the year-ago period.
Highlights of 2010
For full year 2010, MasterCard reported net income of $1.85 billion or $14.05 per share as compared with $1.46 billion or $11.16 per share in 2009. This also came in well ahead of the Zacks Consensus Estimate of $13.95 per share.
Total revenue increased 8.6% year over year to $5.54 billion, almost in line with the Zacks Consensus Estimate of $5.53 billion. On a constant currency basis, net revenue increased 9.5% over prior-year period.
Top line growth was primarily attributable to a 5% favourable pricing change, a 9.1% GDV growth and a 15.2% increase in cross-border volumes. Besides, total operating expenses decreased 1.8% year over year to $2.8 billion in 2010. Consequently, operating income increased 21.8% from 2009, generating operating margin of 49.7% in 2010 against 44.3% in 2009.
As of December 31, 2010, Mastercard’s net operating cash flow was $1.70 billion, up from $1.38 billion as of December 31, 2009. At the end of 2010, cash and cash equivalents increased to $3.07 billion from $2.06 billion at the end of 2009 while long term debt reduced to nil from $22 million at the end of 2009.
Meanwhile, retained earnings increased to $2.92 billion from $1.15 billion at the end of 2009. Total equity grew to $5.23 billion from $3.51 billion as of December 31, 2009.
Dividend Update
On December 7, 2010, the board of MasterCard announced a quarterly cash dividend of 15 cents to holders of shares of its Class A common stock and Class B common stock. The dividend will be paid on February 9, 2011 to the respective shareholders of record as on January 10, 2011.
Our Take
MasterCard’s results have kept pace with its prime competitor, Visa Inc. (V) that reported its fiscal first quarter earnings of $1.23 per share on February 2, 2011. This came in a couple of pennies ahead of the Zacks Consensus Estimate of $1.21 and substantially ahead of $1.02 per share reported in the year-ago quarter.
MasterCard benefits from strong secular demand growth, meaningful international exposure, 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, 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.
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