MasterCard Incorporated’s (MA) fourth-quarter earnings (excluding special items) of $2.24 per share came in substantially below the Zacks Consensus Estimate of $2.47. However, this compares favorably with the earnings of $1.85 per share in the year-ago quarter. Earnings for the reported quarter included an after-tax severance charge of $0.19 per share.
The results for the reported quarter improved over the prior-year quarter due primarily to better pricing, an increased number of processed transactions and a lower tax rate. However, higher operating expenses as a result of increased personnel costs due to severance-related charges were the downside.
Estimate Revisions Trend
Over the last 7 days, four out of the 33 analysts covering the stock have increased estimates for full-year 2010, while none moved in the opposite direction. Currently, the Zacks Consensus Estimate for 2010 is a gain of $13.58 per share, which would be a 21.4% improvement over full-year 2009 earnings.
The absence of estimate revisions for 2010 in the downward direction indicates a likelihood of upward pressure on the performance of the stock in the upcoming quarters. However, the reported quarter’s earnings surprise is not reflected in the estimate revisions yet. As a result, the stock retains its Zacks # 3 Rank, which translates into a short-term Neutral rating. Also, considering the current fundamentals of MasterCard, we maintain a long-term Neutral recommendation on the stock.
With respect to earnings surprises, the stock remained steady over the last four quarters, with only positive surprises. The average surprise remained at 12%. This implies that MasterCard has surpassed the Zacks Consensus Estimate by 12% over the last four quarters. The current Zacks Consensus Estimates for the first quarter and full-year 2010 are earnings of $3.19 and $13.58 per share, respectively. The upside potential of the estimates for the first quarter and full-year 2010, essentially a proxy for future earnings surprises, currently stands at 1.3% and 2.0%, respectively.
Quarter in Detail
MasterCard’s GAAP net income for the reported quarter was $294.0 million, up 22.8% from $239.4 million in the prior-year quarter.
For full-year 2009, MasterCard’s net income (excluding special items) came in at $1.5 billion or $11.19 per share, compared to $1.2 billion or $9.41 in the previous year. Total revenue increased 6.0% year-over-year to $1.3 billion, primarily due to better pricing, a 6.7% growth in the number of processed transactions and a 3.9% increase in cross-border volumes. Gross dollar volumes increased 5.3% to $674 billion during the reported quarter.
Total operating expenses (excluding special items) increased 8.9% year-over-year to $830.3 million. Currency fluctuations contributed 3.2 percentage points of the increase in expenses. The overall increase was primarily attributable to a 1.6% increase in general and administrative expenses and a 25.1% increase in advertising and marketing expenses. The operating margin for the reported quarter came in at 36.1%, down from 38.2% in the year-ago quarter.
MasterCard’s effective tax rate (excluding special items) for the reported quarter was 35.8%, down from 46.1% in the year-ago period. The decrease was primarily attributable to a more favorable mix of earnings, a lower state tax rate and a lower provision for tax reserves.
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. 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 and reduce expenses.
After the market closed yesterday, competitor Visa Inc.’s (V) reported its fiscal first quarter (ended Dec 31, 2010) earnings of $1.02 per class A common share. Visa’s earnings were substantially ahead of the Zacks Consensus Estimate of 91 cents and prior-year quarter’s earnings of 74 cents.
Following the earnings release, MasterCard shares have since fallen over 6.6%.
Read the full analyst report on “MA”
Zacks Investment Research
