Payment processor MasterCard Inc. (MA) is slated to report financial results for the third quarter before the market opens Tuesday. On average, 27 analysts surveyed by Thomson Reuters expect the company to post earnings of $2.94 per share for the quarter, with estimates ranging between $2.60 and $3.12 per share. Analysts' estimates typically exclude special items. Revenues for the quarter are estimated to be $1.35 billion, representing a 0.7% growth from the same period last year.
In the year-earlier period, the Purchase, New York-based transaction processing and related services provider had reported a net loss of $194 million or $1.49 per share, and adjusted net income of $322 million or $2.47 per share, while revenues were $1.34 billion, a growth of 23.6% from the previous year.
While announcing the second-quarter results back in July, Robert Selander, MasterCard president and chief executive officer, had stated that the company is adapting well to the challenging economic environment.
Selander then said, "The thoughtful actions we've taken to realign our resources and priorities to match customer and local market needs, as well as our sharp focus on expense management, have enabled us to deliver strong operating margin and net income improvements. At the same time, we continue to invest in the future so that we are solidly positioned once the economic tide begins to turn. We operate a global, flexible and resilient business that will continue to benefit from the ongoing shift toward electronic payments, which consumers, businesses and governments find more efficient, secure and easier to manage."
Despite the general negative impacts of global slowdown in consumer spending and a high global unemployment rate, MasterCard's third-quarter results may reflect positive trends such as secular shift from cash to electronic payments, and the cost-cutting initiatives that the company initiated last year. The factors such as appreciating US dollar, lower gas prices and slower cross-border travel that impacted the second-quarter earnings have eased considerable since then, benefiting the company, whose business model and global diversification also continue to provide a good degree of resilience in the troubled environment.
In the past five quarters, the company's earnings topped the market's consensus significantly. As per reports, the company's long-term earnings per share growth forecast of 17.6% is better than that of rivals American Express Co. (AXP) and Discover Financial Services (DFS).
In an October 12 research note, Credit Suisse upgraded its rating on Mastercard shares to 'Outperform' from 'Neutral', and upped its price target to $255 from $210, which implies 19% upside from the then levels.
According to Credit Suisse analyst Orenbuch, the company's current share price levels represent an attractive entry point. An improvement in spending volumes should translate into improving revenue growth for MasterCard in the coming quarters. This would increase investor confidence in a higher long-term earnings growth rate. The analyst said that despite the global economic downturn, the secular shift from cash to plastic continues. Recognition of both these items should translate to higher multiples for the stocks.
The primary risks to the analyst's call is the potential for increased price competition between the networks, coupled with pricing pressure from bank issuers if interchange rates are reduced. A third risk is the potential for a prolonged economic recession.
Founded in 1966, MasterCard, a franchisor, processor and advisor, develops and markets payment solutions, processes approximately 21 billion transactions each year, and provides analysis and consulting services to financial-institution customers and merchants. The company manages and licenses payment card brands, including MasterCard, MasterCard Electronic, Maestro, and Cirrus, and currently serves more than 24,000 financial institutions in more than 210 countries and territories.
In its preceding second quarter, MasterCard reported a profit of $349.07 million or $2.67 per share, compared to a loss of $746.65 million or $5.70 per share last year, mainly reflecting lower litigation settlement charges. MasterCard's adjusted earnings rose 26.4% to $349 million or $2.67 per share from $276 million or $2.10 per share a year ago. Quarterly revenues were $1.28 billion, up 2.7% from $1.25 billion in the prior-year quarter. On a constant currency basis, net revenue increased 7% from last year. According to the company, the second-quarter revenue growth was fueled by pricing changes, a 7.9% rise in the number of transactions processed to 5.6 billion, and a 5.8% decrease in rebates and incentives. These factors were partially offset by the impact of lower gross dollar volumes.
Amongst others in the industry, Visa Inc. (V), the world's biggest payments network, last Tuesday reported a fourth-quarter net income of $514 million or $0.69 per class A share, compared to prior year's loss of $356 million or $0.45 per class A share, as more customers shifted to electronic payments, even as the company managed to cut back its operating expenses. The San Francisco, California-based credit card transaction processing major's adjusted net income grew to $552 million or $0.74 per class A share from $448 million or $0.58 per class A share a year ago. Net operating revenue increased 10% year-over-year to $1.9 billion, driven primarily by strong contributions from data processing revenues as processed transactions grew 9%.
Joseph Saunders, chairman and chief executive officer of Visa, said, "Visa delivered another quarter and year of solid financial results during this challenging economic environment. Our strong returns are a reflection of consumers' continuing shift to electronic payments, the success of efficiency initiatives and importantly, continued support from our financial institution partners."
On October 12, Credit Suisse, along with Mastercard, upgraded its rating on Visa shares to 'Outperform' from 'Neutral', and increased its price target to $84 from $70, which implies 16% upside from the then levels. The analyst's target valuation for Visa applies a three multiple point premium relative to MasterCard given the size and scope of its debit business, as well as less financial risk from litigation. The analyst believes this should mitigate the potential impact surrounding increased credit card regulation.
Another peer, American Express, which was granted a bank-holding status in November last year, reported on October 22 that its third-quarter profit decreased 21% to $640 million or $0.53 per share from $815 million or $0.70 per share a year ago, impacted by lower consumer card spending and lower loan volumes, amid the global economic recession. Total revenues net of interest expense decreased 16% from last year to $6.02 billion. American Express, nevertheless, said overall billings have stabilized during the last few months, with indications of spending by corporate card-members beginning to pick up.
Pointing to the general trend in the card industry, Kenneth Chenault, American Express chief executive officer, then said, "At the start of the year the economy appeared to be in a freefall, the drop in cardmember spending was accelerating and loan loss rates were rising rapidly. Today, while there is still reason to be cautious about high unemployment levels, we are seeing broad-based improvements in credit quality, the trends in cardmember spending are encouraging and there are signs that the recession may be approaching an end."
Electronic payment services company Discover Financial Services in September posted a sharp growth in third-quarter profit to $559.4 million or $1.07 per share from last year's $180.1 million or $0.37 per share, bolstered by the Visa/MasterCard antitrust litigation settlement. The Riverwoods, Illinois-based company's net revenue advanced to $1.84 billion from $1.25 billion in the previous year. On a managed basis, revenue net of interest expense amounted to $2.39 billion, up from the previous year's revenue of $1.64 billion.
MA closed Monday's regular trading session at $222.65, up $3.63 or 1.66%, on a volume of 2.26 million shares. In the past 52 weeks, shares have been trading in a broad range of $113.05 to $232.25, with a 3-month average volume of 1.64 million shares.
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