MasterCard's Growth Likely to be Hit by Regulations, Lawsuits - Analyst Blog

On Sep 22, 2014, we issued an updated research report on MasterCard Inc. (MA). The company is gaining traction from penetration into mobile payments, along with recent acquisitions. However, the reduction in cross-border fees forthcoming in Europe as well as stringent regulations in Russia and other jurisdictions are expected to hinder growth.

The final verdict on reducing interchange fees in European Union (EU) earlier this month, followed by a fresh tussle with retailers in the U.K., who now demand reduction in domestic interbank rates will likely weigh on MasterCard's financials significantly.

Moreover, regulatory amendments in Russia, slated to be enacted in Oct 2014, are anticipated to weigh on the top line by about $50 million in 2015.  The eventual migration of JP Morgan Chase's consumer credit portfolio to arch-rival Visa Inc. (V) is also expected to limit GDV and cross-border volumes.

Nevertheless, a major shift toward cashless payments is offering opportunities to MasterCard to provide an array of secure and user-friendly products, such as its Mobile Money Partnership Program (MMPP), digital wallet – MasterPass and similar secure fund transfer platforms through near field communication (NFC)-enabled mobile devices.

MasterCard continues to drive growth through improved pricing, along with a consistent rise in processed transactions. The company's gross dollar volume (GDV) is expected to grow in low double digits in the coming quarters. These signs are encouraging as they account for the key revenue drivers of MasterCard's business.

Moreover, the strategic alliances with the governments, banks and corporations of global nations bode well for the company's expansion in e-Commerce. Notably, Apple Pay was its latest move with respect to this. The acquisition of ElectraCard Services Private Ltd. (ECS) will enhance turnkey payment processing solutions, while that of Pinpoint will increase customer loyalty for MasterCard.

This Zacks Rank #3 (Hold) stock has delivered positive earnings surprises in 3 of the last 4 quarters with an average beat of 1.5%. The company's second-quarter 2014 earnings was higher than the Zacks Consensus Estimate and the year-ago quarter figure by 3.9% and 14.3%, respectively.

Overall, a balanced risk-reward profile in the near term has prompted only minimal estimate revisions for 2014 and 2015 in the past 60 days. The Zacks Consensus Estimate for 2014 and 2015 dipped by 2 cents each, to $3.00 and $3.58 per share, respectively. However, on a year-over-year basis, earnings are expected to grow by about 15.0% in 2014 and 19.3% in 2015.

Key Picks in the Sector

Investors interested in the financial services sector could consider stocks like Vantiv Inc. (VNTV) and Green Dot Corp. (GDOT). Both these sport a Zacks Rank #1 (Strong Buy).