Quick Thoughts: MA – Beyond the Switch

  • MA is aggressively buying back stock with the payout ratio in 2014Q1 rising to 2x as the firm repurchased $1.7bn funded in part by an inaugural debt issue of $1.5bn (taking the debt-to-equity ratio to 22%). The repurchase of 21mm shares (vs. 15mm in the year-ago quarter) lifted EPS by 3 cents to 73 cents in yesterday’s report (vs. consensus of 72 cents).
  • Net revenue growth of 14% (on both a reported and constant-currency basis as a strong Euro offset the weak Brazilian real) was slightly ahead of expectations, and equal to growth in the dollar-volume of transactions (GDV) in part because cross-border fees (accounting for 30% of revenues) increased at the same 17% rate as transactions; a mix-shift (to intra-Europe flows) offset the impact of last April’s (now lapped) cross-border price increases.
  • Despite Russia (~2% of revenue), management reiterated 2013-2015 guidance, first provided in Sep 2012, for growth in revenue (excluding acquisitions and currency effects) of 11-14% and in EPS of at least 20%, but increased the estimate for acquisition-related dilution in 2014 to 6-7 cents from 1-2 cents.
  • During the quarter, MA won two important merchant portfolios (WMT from Discover and TGT from Visa) and was appointed the EMV solution-provider for TGT’s chip-and-pin program across all its cards including the proprietary RED cards (although these will not carry the MasterCard brand or settle over the MasterCard network).


CEO Ajay Banga noted “the convergence in the physical and digital world … represents one of the most significant changes in our space since the introduction of plastic payment cards”, and MasterCard is investing to reposition (e.g. in tokenization and the MasterPass digital wallet), and through acquisitions (including C-SAM which provides mobile wallet software and PinPoint which provides loyalty and rewards services in Asia-Pacific).

More generally, MA is looking  to move beyond its traditional role of switching transactions through providing broader payments-related services and processing. For example, Provus (acquired in 2013Q4) provides issuer, acquirer, and ATM processing in Turkey and HomeSend  (a joint venture with an international carrier) provides remittance services and P2P capabilities. A consequence for earnings is that D&A will increase with the rising capital intensity of the business and with amortization of acquisition-related intangibles.

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