MasterCard Inc.’s (MA) third quarter operating earnings per share of $3.94 came in dramatically ahead of the Zacks Consensus Estimate of $3.54 and $3.45 in the year-ago quarter. Net income for the reported quarter was $518 million, up 14.6% from $452 million in the prior-year quarter.
Results improved over the prior-year quarter due primarily to better pricing, an increased number of processed transactions and reduced operating expenses, which drove the operating margin higher. However, increase in rebates and incentives and the flattish growth in number of processed transactions were on the downside for MasterCard.
Total revenue increased 4.7% year over year to $1.43 billion, above the Zacks Consensus Estimate of $1.41 billion. On a constant currency basis, net revenue increased 7.3% over the prior-year period. The increase was primarily due to a 7% favorable pricing changes, a 0.6% growth in the number of processed transactions to 5.8 billion and a 15.4% increase in cross-border volumes. Gross dollar volume increased 8.5% to $685 billion during the reported quarter. As of September 30, 2010, MasterCard issued 1.6 billion MasterCard and Maestro-branded cards.
Total operating expenses decreased 4.1% year over year to $662 million. Currency fluctuation contributed 1.5 percentage points to the increase in the expenses. The overall decrease was primarily attributable to a 6.7% decrease in general and administrative expenses. While advertising and marketing expenses increased 4.7%, depreciation and amortization expenses remained flat. The operating margin for the reported quarter came in at 53.6%, up from 49.4% in the year-ago quarter.
MasterCard’s effective tax rate for the reported quarter was 32.3%, marginally down from 32.9% in the year-ago period.
As of September 30, 2010, MasterCard’s net operating cash flow was $1.03 billion, down from $1.09 billion as of September 30, 2009. At the end of September 30, 2010, cash and cash equivalents increased to $2.48 billion, long term debt reduced to $1 million, retained earnings increased to $2.52 billion, while total equity was higher at $4.84 billion from December 31, 2009.
Business Update
During the reported quarter, MasterCard enhanced its global debit portfolio with new agreements that include Sovereign Bank, Chevy Chase − now part of Capital One (COF) − and Delta Air Lines (DAL) in the U.S., Barclaycard in Germany and Qatar Islamic Bank. The company also signed a memorandum of understanding with China Union Pay and got into an agreement with Singtel, one of the larger mobile operators in Asia, thereby expanding its presence in emerging growth markets and channels.
Further, on October 22, MasterCard completed the acquisition of DataCash Group plc for about $526 million, expanding its e-Commerce merchant gateway presence in Asia and Australia to European countries and other global high-growth emerging markets.
Our Take
MasterCard’s results have outshone its prime competitor, Visa Inc. (V), which reported its fiscal fourth quarter earnings of 95 cents on October 27, 2010. This came in line with the Zacks Consensus Estimate but came in substantially ahead of 74 cents 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.
MASTERCARD INC (MA): Free Stock Analysis Report
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