MasterCard Beats, Margins Up

MasterCard Inc.’s (MA) second quarter operating earnings per share of $3.49 came in substantially ahead of the Zacks Consensus Estimate of $3.33 and $2.67 in the year-ago quarter. Net income for the reported quarter was $458 million, up 31.2% from $349 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 and reduced operating expenses that drove operating margins higher. However, higher income tax expenses and flattish growth in the number of processed transactions were on the downside for MasterCard.

Total revenue increased 6.7% year over year to $1.37 billion, primarily due to a 4% favorable pricing changes, a 0.1% growth in the number of processed transactions to 5.6 billion and a 15.2% increase in cross-border volumes. GDV increased 8.5% to $656 billion during the reported quarter. As of June 30, 2010, MasterCard issued 1.6 billion MasterCard and Maestro-branded cards.

Total operating expenses decreased 9.7% year over year to $648 million. Currency fluctuation contributed 0.7 percentage point of the increase to the expenses. The overall increase was primarily attributable to a 13.8% decrease in general and administrative expenses and a 3.8% drop in depreciation and amortization expenses. The operating margin for the reported quarter came in at 52.6%, up from 43.5% in the year-ago quarter.

MasterCard’s effective tax rate for the reported quarter was 35.7%, up from 35.0% in the year-ago period. The increase was primarily attributable to some discrete adjustments recorded in the quarter.

As of June 30, 2010, MasterCard’s net operating cash flow was $438 million, down from $778 million as of June 30, 2009. At the end of June 30, 2010, cash and cash equivalents totalled to $2.32 billion; long-term debt totalled to $19 million while total equity was recorded at $4.13 billion.

Dividend Update

On June 7, 2010, the board of MasterCard declared a quarterly cash dividend of 15 cents per share, to the shareholders of its Class A common stock and Class B common stock. The cash dividend will be paid on August 10, 2010 to the holders of record in both categories as on July 6, 2010.

Our Take

MasterCard’s results have outshone its prime competitor, Visa Inc. (V) that reported its fiscal third quarter earnings of 97 cents on July 28, 2010. This came in ahead of the Zacks Consensus Estimate of 93 cents, but was in line with the prior-year quarter.

MasterCard benefits from strong secular demand growth, meaningful international exposure, 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 ongoing financial overhaul reform and scope for increasing cash flow. Hence, the cautious outlook over the near term justifies our Neutral recommendation.

MASTERCARD INC (MA): Free Stock Analysis Report
VISA INC-A (V): Free Stock Analysis Report

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