MasterCard Expands Buyback

Yesterday, the board of the global payment solution giant MasterCard Inc. (MA) approved and authorized the extension of its stock repurchase program to $2 billion from $1 billion, which was sanctioned in September last year. Although the approval is effective immediately, the buyback of its class A shares will be held from time to time through open market operations, depending on the market conditions.

Till date, MasterCard has already bought about 3.15 million shares for approximately $788 million since September 2010. With no long-term debt, cash and equivalents of over $3.0 billion and operating cash flow of $1.70 billion, the company delivers solid free cash flow and is well positioned to return wealth to investors through consistent dividend and share repurchases, which will also help it retain market confidence. This is particularly crucial at a time when card giants like MasterCard and Visa Inc. (V) are facing regulatory mayhem.

The extended stock buyback program also makes perfect sense for MasterCard since pulling out stock from the market at this time, when prices are vacillating in noticeable measures, will automatically lower share count and increase the net income in the hands of the shareholders, in the upcoming quarters.

Estimate Trend Revision

Over the last 30 days, 2 of 26 analysts covering the stock have raised their estimates for the first quarter of 2011, while a couple of downward revisions were witnessed. Currently, the Zacks Consensus Estimate for the first quarter is operating earnings of $4.06 per share, which would be up by 17.4% from the year-ago quarter.

The equal number of upward and downward estimate revisions for the first quarter indicates no clear trend in the performance of the stock in the near term. This reflects MasterCard’s robust growth fundamentals that could be offset by the regulatory snags.

With respect to earnings surprises, the stock has been steady over the last four quarters, with all four positive surprises. The average remained positive at 7.48%. This implies that MasterCard has surpassed the Zacks Consensus Estimate by 7.48% over that period.

The upside potential for the estimate for the first quarter, essentially a proxy for future earnings surprises, currently stands at 0.74%.

MasterCard benefits from strong secular demand growth, meaningful international exposure, high barriers, excellent pricing power, risk-free balance sheet and impressive operating leverage. Furthermore, 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 long term justifies our Neutral recommendation. Conversely, strong fundamentals warrant a Zacks #2 Rank, reflecting a short-term Buy recommendation.

On Tuesday, the shares of MasterCard closed at $262.96, down 1.4%, on the New York Stock Exchange.

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