MasterCard Inc. (MA) on Tuesday reported a profit for the third quarter, compared to a loss in the year-ago period. The latest quarter's results were aided by cost-cutting measures, higher number of transactions processed and lower litigation settlement charges as compared to the year-ago period. Adjusted earnings per share for the quarter surged 41% from last year.
Despite the general negative impacts of global slowdown in consumer spending and a high global unemployment rate, MasterCard's third-quarter results reflect positive trends such as a secular shift from cash to electronic payments, and the cost-cutting initiatives that the company initiated last year.
The factors such as an appreciating U.S. 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.
Further, MasterCard and larger rival Visa Inc. (V) are insulated from credit problems, as they generate revenues from transaction fees they charge banks and their networks do not make loans.
Third-Quarter Results
Net income attributable to MasterCard for the third quarter was $452.20 million or $3.45 per share, compared to net loss of $193.58 million or $1.48 per share in the year-ago period.
The results for the latest quarter include pre-tax litigation settlement charges of $6.2 million, while the year-ago quarter's results include an $827.5 million net pre-tax charge related to an antitrust litigation settlement with Discover Financial Services (DFS).
Excluding special items, net income for the quarter was $456 million or $3.48 per share, up from $322 million or $2.46 per share in the prior-year quarter. On average, twenty seven analysts polled by Thomson Reuters expected the company to report earnings of $2.94 per share for the quarter. Analysts' estimates typically exclude special items.
The Purchase, New York-based company's quarterly revenues were $1.36 billion, up 2.0% from $1.34 billion in the prior-year quarter, and topped analysts' consensus revenue estimate of $1.35 billion for the quarter. On a constant currency basis, net revenue for the quarter increased 3.9% from last year.
The increase in revenues for the quarter were aided by pricing changes that contributed about 6 percentage points of the net revenue growth and a 7.6% increase in the number of transactions processed to 5.8 billion, as customers increasingly turn to plastic forms of payments from cash and checks. These were partially offset by the impact of slightly lower cross border volumes on revenue for the latest quarter, compared to the year-ago period.
Robert Selander, chief executive officer of MasterCard, said, "We are very pleased with our third-quarter financial results, specifically since we began to see signs of stabilization in parts of our business. Total processed transactions continued to grow at a high single-digit rate, with double-digit growth coming from our Asia Pacific/Middle East/Africa and Latin America regions. At the same time, our overall cross-border volumes are steadying with our Asia Pacific region demonstrating significant growth in the quarter, and the U.S. showing a lower rate of decline."
For the sequentially preceding second quarter, MasterCard had reported net income of $349.07 million or $2.67 per share, on revenues of $1.28 billion.
In the past five quarters, MasterCard'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).
Peer Performance
Visa Inc., 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 loss of $356 million or $0.45 per class A share in the prior-year quarter, as more customers shifted to electronic payments. Net operating revenue for the quarter increased 10% year-over-year to $1.9 billion, driven primarily by strong contributions from data processing revenues as processed transactions grew 9%.
American Express, which was granted a bank-holding status in November last year, reported on October 22 that its profit for the 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.
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.
Other Metrics
MasterCard's gross dollar volume for the third quarter was relatively flat, up 0.3% on a local currency basis from the year-ago period at $633 billion. Worldwide purchase volume was also relatively flat at $480 billion, an increase of 0.4% in local currency terms, providing evidence that the global economic recovery is slow.
As of September 30, 2009, the company's financial-institution customers had issued 964 million MasterCard cards, comparable to 963 million MasterCard cards issued at September 30, 2008.
The company's total operating expenses for the quarter dropped 57.3% to $690.77 million from $1.62 billion in the previous-year quarter, primarily due to the net litigation settlement that occurred in the year-ago period.
Excluding special items, total operating expenses for the quarter declined 13.3% from the year-ago quarter to $685 million. The decline in operating expenses was driven by a 7.9% decrease in general and administrative expenses and a 29.4% decrease in advertising and marketing expenses.
Operating income for the quarter was $673.50 million compared to operating loss of $279.26 million in the same period last year.
Year-To-Date Results
For the first nine months, MasterCard reported net income of $1.169 billion or $8.92 per share, compared to net loss of $493.36 million or $3.76 per share a year ago.
Adjusted net income for the period increased to $1.173 billion or $8.95 per share from $996 million or $7.56 per share in the prior-year period.
Net revenue for the nine-month period increased 0.9% to $3.80 billion from $3.77 billion in the year-ago period. On a constant currency basis, net revenue for the period increased 4.4% from last year.
Other Developments
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.
Stock Quotes
In Tuesday's regular trading session, MA is trading at $215.05, down $7.60 or 3.41% on a volume of 2.79 million shares. In the 52-week period, the stock has been trading in a range of $113.05-$232.25.
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