MasterCard Inc. (MA) reported fourth-quarter 2014 operating earnings per share (EPS) of 72 cents, comfortably exceeding both the Zacks Consensus Estimate of 67 cents and the year-ago quarter figure of 57 cents. The company thus kept its earnings streak alive in all of 2014, with trailing four-quarter average beat of 6.7%. EPS was hurt by 3 cents due to the adverse impact of acquisitions in the reported quarter.
Operating net income escalated 17.1% year over year to $801 million. The prior-year quarter included post-tax litigation provision charge of $61 million or 5 cents per share, including which reported net income was $623 million or 52 cents a share. However, no special item was recorded in the reported quarter.
Results reflected improved top line on increased number of processed transactions and strong gross dollar value (GDV) growth during the reported quarter, along with a lower tax rate. These were partially offset by higher operating expenses, which even weakened operating margin and cash flows.
Net revenue grew 13.6% year over year and 17% on a constant currency basis to $2.42 billion, and breezed past the Zacks Consensus Estimate of $2.38 billion. Acquisitions in the quarter accounted for 3% of total revenue growth.
The upside was primarily due to an 11% rise in the number of processed transactions to 11.6 billion along with a 19% increase in cross-border volumes. These were partially offset by higher rebates and incentives, primarily attributable to new and renewed business alliances.
During the reported quarter, the GDV increased 13% to $1.3 trillion, while worldwide purchase volume rose 12% year over year, on a constant currency basis, to $858 billion. As of Dec 31, 2014, MasterCard had issued over 2.1 billion MasterCard-and Maestro-branded cards.
Excluding litigation charge in the prior-year quarter, total core operating expenses spiked 25.8% year over year to $1.4 billion. The overall increase primarily resulted from a surge of 18.3% in depreciation and amortization expenses and a 35.9% uptick in general and administrative expenses. Advertising and marketing expenses rose by 5%, while acquisitions accounted for 9% of the rise in expenses.
Core operating income edged up 0.3% year over year to $1.02 billion in the reported quarter. Subsequently, operating margin deteriorated to 42.1% from 47.7% in the year-ago quarter. Additionally, interest expenses rose to $16 million as against $7 millionin the prior-year quarter. MasterCard's effective tax rate was 20.3%, lower than 32% in the year-ago period.
Highlights of 2014
For full-year 2014, MasterCard’s operating earnings stood at $3.10 per share, beating the Zacks Consensus Estimate of $3.08 and soaring from $2.61 generated in 2013. EPS had an adverse impact of 4 cents due to acquisitions in 2014.
Operating net income increased 13.8% year over year to $3.62 billion. Including a post-tax litigation provision charge of $61 million or 5 cents a share in 2013, reported net income stood at $3.12 billion or $2.56 per share in 2013, while no such extraordinary items were recorded in 2014.
Net revenue increased 13.5% year over year and 14% on constant currency basis to $9.47 billion, and breezed past the Zacks Consensus Estimate of $9.44 billion. Acquisitions accounted for 2% of total revenue growth.
Excluding litigation charge in 2013, total core operating expenses grew 16.5% year over year to $4.37 billion. However, core operating income increased 11% year over year to $5.11 billion in 2014, although core operating margin dipped to 53.9% from 55.1% in the prior year.
Financial Update
As of Dec 31, 2014, MasterCard’s net operating cash flow decreased 17.6% year over year to $3.41 billion, primarily owing to higher accrued litigation and legal settlements as well as other prepaid expenses and investments in acquisitions and strategic initiatives.
At the end of 2014, cash and cash equivalents increased to $5.14 billion from $3.6 billion at 2013-end, while long-term debt stood at $1.49 billion against nil debt at 2013-end.
Meanwhile, retained earnings increased to $13.17 billion at the end of 2014 from $10.12 billion at 2013-end. Moreover, total equity declined to $6.82 billion from $7.5 billion at Dec 2013.
Share Repurchase Update
During the reported quarter, MasterCard repurchased about 2.1 million shares for $155 million. Until Jan 23, 2015, the company bought back another 2.5 million shares for $215 million. Overall, MasterCard re-bought 44.5 million shares for $3.4 billion in 2014.
On Dec 2, 2014, the board of MasterCard sanctioned a new share repurchase program worth $3.75 billion, higher than $3.5 billion authorized in Dec 2013. The aforementioned repurchases completed the $275 million from the prior authorization, currently leaving the company with $3.8 billion worth of shares available for buybacks.
Dividend Update
On Dec 2, 2014, the board of MasterCard hiked its regular quarterly dividend by 45.5% to 16 cents per share from the prior payout of 11 cents. The raised dividend will be paid on Feb 9, 2015, to shareholders of record as on Jan 9.
The increased dividend brings the annual dividend to 64 cents from 44 cents paid in 2014. The previous hike of 83% was announced in Dec 2013, backed by 100% increments both in Feb 2013 and 2012.
On Nov 10, 2014, MasterCard declared a quarterly cash dividend of 11 cents a share to shareholders of record as on Oct 9.
Zacks Rank
MasterCard currently carries a Zacks Rank #3 (Hold).
Peers
Yesterday, MasterCard’s arch-rival – Visa Inc. (V) – also beat on its fiscal first-quarter earnings, thanks to improved top line across segments. The company reported operating earnings of $2.53 per share, outpacing the Zacks Consensus Estimate of $2.50 and the prior-year quarter figure of $2.20 per share.
On Jan 21, Visa’s close competitor, American Express Co. (AXP) reported fourth-quarter 2014 operating earnings per share of $1.39, which surpassed the Zacks Consensus Estimate of by a penny. This marked the company’s fourth consecutive earnings beat. EPS also topped the year-ago quarter figure of $1.21 by 15%. Improved cardmember spending was partly offset by slightly higher expenses.
On the same day, another peer, Discover Financial Services (DFS) reported fourth-quarter 2014 earnings per share of $1.19 that missed the Zacks Consensus Estimate of $1.30 and lagged 3% from the year-ago quarter. Higher loan reserves and lower revenues primarily led to the decline in earnings.
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