MasterCard - Solid Quarter Puts Payment Company On Track For Record Year

Nov. 1.12 | About: MasterCard Incorporated (MA)

Shares of MasterCard (MA) rose 1.7% in Wednesday's trading session. The global payment and technology company connecting consumers, merchants and financial institutions announced a solid set of third quarter results.

Third Quarter Results

MasterCard reported third quarter revenues of $1.92 billion, up 5.5% on the year. In constant currencies, revenues rose some 10%. Growth was driven by 14% increase in gross dollar volume to $918 billion, in local currencies. The number of transactions rose 24% to 8.7 billion. Revenues fell slightly short of analysts expectations of $1.94 billion.

The company reported a net income of $772 million, up 8% on the year before. Earnings per share rose 10% to $6.17 per diluted share and beat analysts consensus of $5.92 per share. In constant currencies, earnings per share rose some 15%.

During the quarter, MasterCard repurchased roughly 0.5 million shares for a consideration of $216 million. The company has $1.1 billion remaining under its $1.5 billion repurchase program.

CEO Ajay Banga commented on the results, "MasterCard continues to drive solid financial performance and focus on executing key deals, investments and partnerships. We won significant business in Europe this quarter with Nordea, Credit Agricole and CSOB in the Czech Republic and, in the US, we acquired loyalty reward provider Truaxis to better connect consumers with targeted, relevant offers."

Segmental Information

MasterCard reported a 14% growth in gross dollar transaction volumes to $918 billion.

International transaction volumes rose 16.8% to $628 billion. Strong international growth was driven by solid performance in Asia-Pacific, Middle-East and Africa. Revenues in this geographic area rose 21.2% in local currencies to $251 billion.

Volumes in Europe grew 14.5% in local currencies. Softness in Southern European countries was offset by strength in North and Eastern Europe. Latin American gross dollar volumes were up 16.4% to $74 billion as government stimulus programs in Brazil boosted the number of transactions in the country.

Gross dollar volumes in the US rose 7.0% to $290 billion. US consumers are holding tight on their budgets, despite a modest increase in consumer confidence. Furthermore, MasterCard gained market share in the debit market from Visa, among others.

Valuation

MasterCard ended its third quarter with $5.6 billion in cash, equivalents and investment securities. The company operates without the assumption of debt, for a comfortable net cash position.

For the first nine months of 2012, MasterCard generated revenues of $5.50 billion. The company net earned $2.15 billion, or $17.07 per diluted share. The company is on track to generate revenues of $7.5 billion, on which the company could earn $3 billion, almost $24 per share.

The market currently values MasterCard at roughly $57.5 billion. This values the operating assets of the firm at roughly $52 billion. The valuation comes down to 6.9 times annual revenues and 17-18 times annual earnings.

MasterCard pays a very modest dividend of $0.30 per quarter, for an annual dividend yield of 0.3%.

Investment Thesis

Year to date, shares of MasterCard have risen roughly 24%. Shares steadily rose from levels of $340 in January and rallied to $450 in April. Shares temporarily fell back to $400 in May and peaked at $485 a little earlier this month. Shares are currently exchanging hands at $460 per share.

Over the past five years, shares have almost tripled. Shares traded as low as $125 the beginning of 2009 and gradually moved higher. Between 2008 and 2012, MasterCard boosted its revenues from $5.0 billion to an estimated $7.5 billion this year. The company reported a $253 million loss in 2008. For the full year of 2012, record profits around $3 billion are to be expected.

Shares of MasterCard are currently valued at 17-18 times annual earnings. The valuation of the global payment company is fair given its history of strong earnings growth. The valuation seems cheap in comparison with Visa (V) which as a much higher valuation in terms of revenue and earnings. On top of that, MasterCard has a greater emerging market exposure, boosting the firm's growth profile.

In August of this year, I already looked at the prospects for MasterCard's shares. From that point in time, shares have almost risen 10%. The company remains on track to innovate, and aggressively develop mobile payment solutions. This is very important as mobile systems are crucial in growth areas like Africa, which lack developed banking systems.

Shares rose after the Federal Reserve Board announced its QE3 program and the major payment companies have resolved their litigation issues with US merchants. MasterCard previously announced that the settlements would cost $790 million, compared to $4.4 billion for Visa.

Shareholders remain content with MasterCard on Wednesday. The company has numerous joint ventures with banks, financial institutions, technology and telecommunication companies to remain on the frontier of the global payment industry. The company realizes that payment methods might change rapidly in the medium term future, and MasterCard wants to make sure it remains a leading firm. The strong balance sheet allows MasterCard to make acquisitions when necessary, to stay upfront. Additionally, the company could potentially increase dividend payments or speed up share repurchases.

I reiterate my investment thesis, which I wrote up in August. Investors might add MasterCard as an investment, or set up a pair trade by initiating a short position in Visa.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.