MasterCard Excels Once Again

MasterCard Inc.’s (MA) first quarter operating earnings per share of $4.29 came in significantly ahead of the Zacks Consensus Estimate of $4.10 and $3.46 in the year-ago quarter. Net income for the reported quarter was $562 million, up 23.6% from $455 million in the prior-year quarter.

Results for the reported quarter improved over the prior-year quarter primarily due to better pricing, an increased number of processed transactions, strong gross dollar value (GDV) growth and a lower tax rate that also drove the operating margin. However, increase in rebates and incentives and higher operating expenses were on the downside.

Total revenue increased 14.8% year over year to $1.50 billion, also above the Zacks Consensus Estimate of $1.45 billion. Meanwhile, currency fluctuations had a neutral impact on net revenue growth. The increase was primarily due to 5% favourable pricing changes, an 11.1% growth in the number of processed transactions to 6.0 billion and an 18.5% increase in cross-border volumes.

GDV increased 12.8% to $728 billion while worldwide purchase volume climbed 12.9% year over year to $545 billion, during the reported quarter. As of March 31, 2011, MasterCard issued 1.7 billion MasterCard-and Maestro-branded cards.

Total operating expenses increased 9.4% year over year to $655 million. Currency fluctuations contributed marginally to the increase in the expenses. The overall increase was primarily attributable to a 7.9% increase in general and administrative expenses.

While advertising and marketing expenses increased 12.1%, depreciation and amortization expenses grew 20.0% from year-ago quarter. However, operating margin came in at 55.7%, up from 53.5% in the year-ago quarter.

MasterCard’s effective tax rate for the reported quarter was 32.8%, modestly lower than 34.6% in the year-ago period, primarily attributable to a favorable geographic mix of earnings.

As of March 31, 2011, MasterCard’s net operating cash flow was $355 million, up from $95 million as of March 31, 2010. At the end of reported quarter, cash and cash equivalents decreased to $2.95 billion from $3.07 billion at the end of 2010 while long term-debt was nil.

Meanwhile, retained earnings increased to $3.46 billion from $2.92 billion at the end of 2010. Total equity grew to $5.20 billion from $5.22 billion as of December 31, 2010.

Share Repurchase Update

During the reported quarter, MasterCard repurchased about 2.6 million shares of class A common stock for $654 million under its $1 billion share repurchase program, which was sanctioned on September 14, 2010.

On April 12, 2011, MasterCard approved and authorized the extension of its stock repurchase program to $2 billion from $1 billion. Although the approval is effective immediately, the buyback of its class A shares will be held periodically through open market operations, depending on the market conditions.

Until April-end, MasterCard has already bought about 3.9 million shares for approximately $1.0 billion since September 2010.

Business Update

During the reported quarter, MasterCard launched Travelex Cash Passport in Brazil and South Africa and recently completed the acquisition of the Card Program Management assets of Travelex, which would further allow the company to expand its prepaid card services globally. MasterCard also signed a long-term debit renewal with Poste Italiane, one of the largest debit issuers in Europe.

Dividend Update

On February 8, 2011, the board of MasterCard announced a quarterly cash dividend of 15 cents to holders of shares of its Class A common stock and Class B common stock. The dividend will be payable on May 9, 2011 to the respective shareholders of record as on April 8, 2011.

Our Take

MasterCard’s prime peer, Visa Inc. (V), is expected to report its fiscal second quarter earnings results after the market closes on May 5, 2011.

MasterCard benefits from strong secular demand growth, meaningful international exposure, diversified product portfolio, high barriers, excellent pricing power, risk-free balance sheet and impressive operating leverage. Also, 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 near term justifies our Neutral recommendation.

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