MasterCard's (MA) Capital Strong Despite Acquisitions, Debt - Analyst Blog

On Dec 8, 2014, we issued an updated research report on MasterCard Inc. (MA). The company's secure capital position, despite its string of acquisitions and debt issuance in 2014, is commendable. An efficient capital deployment strategy along with organic growth initiatives should further counter competitive and market risks.

This Zacks Rank #3 (Hold) stock has delivered positive earnings surprises in three of the last four quarters with an average beat of 3.6%. The company's third-quarter 2014 earnings topped both the Zacks Consensus Estimate and the year-ago quarter figure by 14.1% and 21.9%, respectively.

MasterCard is steadily gaining competitive advantage on its recent acquisitions, alliances, along with product-diversification and geographic-expansion initiatives. Rapidly growing digital payments and technology upgrades are minimizing the gap toward cashless payments, and raising opportunities for long-term growth.

The expansion of MasterPass to about 14 countries so far, and ease of sanctions in China and Myanmar generate optimism over management's expectation of delivering earnings growth of at least 20% in the next two to three years.

While cash flows remained weak in the first nine months of 2014, given five consecutive acquisitions and $1.5 billion of debt issuance earlier this year, MasterCard's effective capital deployment assures incremental shareholder return. This is also reflected by the recent 45.5% hike in dividends and expansion of new buyback program by $3.75 billion. The company is also likely to maintain a safe long-term adjusted debt-to-EBITDA of 1.0x going ahead.

Risks Ahead

Nevertheless, caution remains on increased regulatory compliances and economic volatility in global markets. Implementation of the new payments law in Russia is delayed to Mar 2015 from Oct 2014, while a final verdict on capping of interchange fees in European Union is expected in the first half of 2015. Although these timelines may not affect financials this year, the amendments will likely have significant adverse implications in 2015 and beyond.

Moreover, higher international dependence, stiff competition, currency fluctuations, operating challenges across emerging economies and higher expenses, threaten both the top line and operating leverage. A 10% adverse currency fluctuation is expected to cause a loss of $193 million in the company's hedging program, thereby raising ample market and counterparty credit risks.

Overall, a balanced risk-reward profile in the near term prompted slight upward estimate revisions for 2014 and 2015 in the past 60 days. The Zacks Consensus Estimate for 2014 and 2015 moved north by 2.3% and 0.6% to $3.07 and $3.60 per share, respectively. On a year-over-year basis, earnings are expected to grow by about 17.8% in 2014 and 17.3% in 2015.

Moreover, the Most Accurate estimate for MasterCard's 2014 and 2015 earnings currently stand at $3.05 and $3.63 a share, respectively, translating into Earnings ESP of -0.7% and +0.8%, respectively. While this indicates a likely earnings miss for 2014, it also signals possibility of an earnings beat next year.

Key Picks in the Sector

Investors interested in the financial services sector could consider better-ranked stocks like Higher One Holdings Inc. (ONE), Global Payments Inc. (GPN) and Fidelity National Information Services Inc. (FIS). All these carry a Zacks Rank #2 (Buy).

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