MasterCard Inc.’s (MA) second-quarter operating earnings per share of $4.76 came in drastically ahead of the Zacks Consensus Estimate of $4.20 and $3.50 in the year-ago quarter. Net income for the reported quarter was $608 million, up 32.8% from $458 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 spiked 22.1% year over year to $1.67 billion, also exceeding the Zacks Consensus Estimate of $1.55 billion. On a constant currency basis, net revenue increased 18.0% while excluding acquisitions, revenue witnessed a 19.0% growth over prior-year quarter. The increase was primarily due to a 17.4% growth in the number of processed transactions to 6.0 billion and an 19.3% increase in cross-border volumes.
GDV increased 16.4% to $811 billion while worldwide purchase volume climbed 16.3% year over year to $608 billion, during the reported quarter. As of June 30, 2011, MasterCard issued 1.7 billion MasterCard-and Maestro-branded cards.
Total operating expenses increased 20.7% year over year to $782 million. Excluding currency fluctuations, operating expenses were up 17.1% over year-ago period.
The overall increase was primarily attributable to a 24.7% increase in general and administrative expenses. While advertising and marketing expenses climbed 7.2%, depreciation and amortization expenses grew 40.0% from year-ago quarter.
Besides, excluding acquisition related expense, total operating expenses increased 14.0% over prior-year quarter. However, operating margin came in at 53.1%, marginally up from 52.6% in the year-ago quarter.
MasterCard's effective tax rate for the reported quarter was 31.8%, modestly lower than 35.7% in the year-ago period, primarily attributable to a favourable geographic mix of earnings in 2011.
As of June 30, 2011, MasterCard’s net operating cash flow was $893 million, up from $438 million as of June 30, 2010. At the end of reported quarter, cash and cash equivalents decreased to $2.76 billion from $3.07 billion at the end of 2010 while long term-debt was nil.
Meanwhile, retained earnings increased to $4.05 billion from $2.92 billion at the end of 2010. Total equity grew to $5.48 billion from $5.22 billion as of December 31, 2010.
Share Repurchase Update
During the reported quarter, MasterCard repurchased about 1.5 million shares of class A common stock for $387 million. Until July-end, MasterCard has already bought about an additional 77,770 shares for approximately $24 million since the second quarter of 2011.
On April 12, 2011, MasterCard approved and authorized the extension of its stock repurchase program to $2 billion from $1 billion. Till date, about $935 million of stock remains available under the current repurchase program authorization.
Business Update
On July 19, 2011, MasterCard announced that the company along with Visa Inc. (V), Discover Financial Services (DFS) and Amercian Express Co. (AXP) have joined hands with Isis, leading mobile platform in the U.S., to initiate mobile commerce in the U.S.
Besides, the company also agreed with Google and multiple partners to launch the Google Wallet. Additionally, the previously announced Orange and Barclaycard contact-less mobile payment service became available to U.K. consumers in May this year.
Moreover, MasterCard entered into a commercial alliance with China Union Pay to enable its cards for cross-border e-Commerce, coupled with a new, multi-product agreement with Swedbank in the Nordics and Baltics region, during the reported quarter.
Dividend Update
On June 7, 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 August 9, 2011 to the respective shareholders of record as on July 8, 2011.
On May 9, MasterCard paid its quarterly cash dividend of 15 cents to shareholders of its equity classes of record as on April 8, 2011.
Our Take
MasterCard’s prime peer, Visa reported its fiscal third quarter 2011 (ended June 30, 2011) results last week. Operating earnings of $1.26 per Class A common share were triple pennies ahead of the Zacks Consensus Estimate of $1.23 per share. Results also substantially exceeded 96 cents reported in the year-ago quarter.
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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