Is MasterCard Signaling Caution?

MasterCard Incorporated (MA) reported earnings on Thursday that beat expectations.  The numbers came in with revenues up 25% to $1,246 million for the quarter and pro-forma earnings of $2.11.  The earnings number beat the consensus estimates by $0.09 and yet the stock was off more than 10% during the trading session.

When looking deeper into the numbers, it appears the company managed to beat expectations primarily by cutting back on the marketing expenses for the quarter.  This raises concerns that management may see weakening trends in the overall credit/debit card environment and is less willing to invest capital in marketing initiatives.

The company is still growing on both a revenue and a transaction basis but the growth rate is less attractive than what we have seen in previous quarters.  While the international growth remains fairly robust, the US is grinding lower as US credit purchase volume grew by only 2.8% compared to 6% last quarter.  Looking into the revenue growth of 25%, management stated that 5 percentage points were due to pricing increases and another 5% were due to favorable currency trends.  It appears doubtful that the company will be able to maintain pricing power with a weakening consumer and increased competition with American Express Company (AXP), Discover Financial Services (DFS) and Visa Inc. (V).  This leads to an “organic” growth rate of 15% which certainly calls the current multiple on the stock into question.

An interesting aside note is that the actual reported EPS came in at a $5.74 loss per share.  A large portion of this loss was due to a $1 billion dollar settlement with American Express which will take a significant chunk of capital off the balance sheet.  The company continues to be in litigation with Discover Financial Services and hopes to settle the dispute soon.  That could mean another large payout which may not affect future earnings but could again cause a hit to the company’s capital base.

Management indicated that the company repurchased 1.3 million shares during the quarter.  This may have had a positive effect on the stock over the last 3 months but at this point the buyback program is completed.  In order for a new program to be initiated, the board would have to approve a repurchase and this has not yet been announced.

As explained in previous posts, I am concerned that the weakening global economy could cause the company to miss analysts expectations over the next several quarters.  The risk appears to be for the stock to trade lower especially considering the “good news” released Thursday and the overall market reaction.  I remain short MA and would urge readers to use caution investing in this growth stock.

Disclosure: Author has a short position in MA

Comments

[Al Rob:]

Is MasterCard Signaling Caution?

Yes.. do you really think people will let them get away with their biz model for long?

Now that the profits aren't hidden in the bank's black box there is going to be massive litigation. The lawyers smell money.

2008 Jul 31 04:24 PM

[sohony:]

good article--yes it's a short marketing his position but this is exactly the kind of informed shorting that keeps a market honest and makes bubbles less likely--in short the check and balance to the the market that christopher cox and the rest of the (at this point) rather raggedy looking plunge protection team would like to remove from the market for as long as possible if not permanently

2008 Jul 31 04:38 PM

[Echo To All:]

"the company managed to beat expectations primarily by cutting back on the marketing expenses for the quarter"

Some would consider this cost control, not weakness. But to each their own... i guess.

So when is cheap enough? No doubt multiple contraction is present, but when has it contracted enough?

I believe MA has beat every quarter, and now they will simply not going forward?

The US is a saturated market much more leveraged to economic growth when dealing with transactions, yet even in this horrible consumer environment there was still some transaction growth.

if anything, the fact that US transaction growth was even present in the horrible US consumer environment suggest the continued favorable paper-to-plastic trend.

I agree multiple contraction needed to occur, I just do not agree with ur reasoning.

2008 Jul 31 11:31 PM

[martyg:]

gas stations in nj (and maybe elsewhere) are in competition with master card and visa. don't use your credit card, pay with cash and save 10cts per gallon of gas.

cash still seems to be king.

2008 Aug 01 08:31 AM

[Ames Tiedeman:]

MA was extended when it was trading over 300. It is that simple.

2008 Aug 02 10:55 AM

[Metzenbaum ...:]

Missed analysts expectations = analysts were wrong.

This phrase is Wall St. a**-covering. Let's remember the rocket surgeons were wrong in their estimates. The company reported a fact, and the opinion of the financial astrologer was wrong.

Talk about spin, "we were wrong, but we blame the stock." Yeesh.

2008 Aug 04 08:18 AM