Balanced View on MasterCard - Analyst Blog

On Jun 20, 2014, we issued an updated research report on MasterCard Inc. MA. While costs related to acquisitions and borrowing, along with regulatory compliances may limit a rise in margins in the near term, the company's organic growth remains strong.

This Zacks Rank #3 (Hold) stock has delivered positive earnings surprises in 3 of the last 4 quarters with an average beat of 3.3%. The company's first-quarter 2014 earnings topped both the Zacks Consensus Estimate by 1.4% and was higher than the year-ago quarter figure by 17.7%.

The recent acquisitions (C-SAM and Provus), alliances and technology upgrades, product- diversification (through e-Commerce, prepaid and mobile commerce) and geographic-expansion initiatives are expected to drive long-term growth.

Going ahead, the pending acquisitions of ElectraCard Services and Pinpointwill will further enhance MasterCard's turnkey payment processing solutions and customer loyalty. These should also help management to outperform its target of maintaining operating margins above the 50% benchmark and top-line growth of about 11–14% for 2013–2016.

Meanwhile, Moody's expects the company to operate favorably with the $1.5 billion debt raised in Mar 2014, and still maintain a long-term adjusted debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) of 1.0x going ahead. A strong financial position and incremental capital deployment also stem from improving operating leverage.

Conversely, MasterCard's high international exposure poses headwinds like regulatory norms, currency fluctuations and other operating challenges. Management's projection of generating net revenue growth in 2014 at the lower-end of the 2013–2016 CAGR range of 11–14% also reflect competitive pressure from peers, currency fluctuations and higher chances of implementation of amended regulations that may adversely affect cash flow.

Overall, a balanced risk-reward balance in the near term has kept estimate revisions for 2014 and 2015 unaltered in the past 30 days. The Zacks Consensus Estimate for 2014 and 2015 is pegged at $3.02 and $3.60 per share, respectively. However, on a year-over-year basis, earnings are expected to grow by about 15.8% in 2014 and 19.1% in 2015.

Key Picks in the Sector

Some better-ranked stocks in the financial sector include VeriFone Systems Inc. PAY, Xoom Corp. XOOM and Fidelity National Information Services Inc. FIS. All these stocks sport a Zacks Rank #1 (Strong Buy).