MasterCard Inc.’s (MA) third-quarter 2011 operating earnings per share of $5.63 came in drastically ahead of the Zacks Consensus Estimate of $4.81 and $3.94 in the year-ago quarter. Net income for the reported quarter stood at $717 million, spiking 38.4% from $518 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 downside.
Total revenue surged 27.3% year over year to $1.82 billion, also beating the Zacks Consensus Estimate of $1.71 billion. On a constant currency basis, net revenue increased 23.8%, while excluding acquisitions, net revenue grew about 24.0%. The increase was primarily due to a 20.5% growth in the number of processed transactions and a 19.3% increase in cross-border volumes.
During the reported quarter, GDV increased 18.1% to $844 billion while worldwide purchase volume climbed 17.2% year over year, on constant currency basis, to $628 billion. As of September 30, 2011, MasterCard issued 1.7 billion MasterCard-and Maestro-branded cards.
Total operating expenses increased 23.3% year over year to $816 million. Excluding currency fluctuations, operating expenses were up 20.8% over year-ago period. The overall increase was primarily attributable to a 27.3% increase in general and administrative expenses. While advertising and marketing expenses climbed 9.8%, depreciation and amortization expenses grew 38.9% from year-ago quarter.
Besides, excluding acquisition related expense, total operating expenses increased 15.0% over prior-year quarter. However, operating margin soar to 55.1%, modestly up from 53.6% in the year-ago quarter.
MasterCard's effective tax rate for the reported quarter was 30.5%, modestly lower than 32.3% in the year-ago period, primarily attributable to a favourable geographic mix of earnings in 2011.
As of September 30, 2011, MasterCard’s net operating cash flow grew to $1.90 billion, up from $1.03 billion as of September 30, 2010. At the end of reported quarter, cash and cash equivalents decreased to $3.75 billion from $3.07 billion at the end of 2010 while long term-debt was nil.
Meanwhile, retained earnings increased to $4.75 billion from $2.92 billion at the end of 2010. Total equity grew to $5.98 billion from $5.22 billion as of December 31, 2010.
Share Repurchase Update
During the reported quarter, MasterCard repurchased about 0.25 million shares for $77 million. Until October-end, MasterCard has already bought about an additional 10,900 shares for approximately $3 million since the third quarter of 2011.
On April 12, 2011, MasterCard approved and authorized the extension of its stock repurchase program to $2 billion from $1 billion. To date, about $879 million of stock remains available under the current repurchase program authorization.
Dividend Update
On September 21, 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 November 9, 2011 to the respective shareholders of record as on October 10, 2011.
On August 9, MasterCard paid its quarterly cash dividend of 15 cents to shareholders of its equity classes of record as on July 8, 2011.
Our Take
Last month, MasterCard’s prime peer, Visa Inc. (V) reported fiscal fourth quarter 2011 (ended September 30, 2011) operating earnings of $1.27 per Class A common share were 3 cents ahead of the Zacks Consensus Estimate. Results also substantially exceeded $1.06 per share reported in the year-ago quarter on lower share count.
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, increased operating expenses, 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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