MasterCard Earnings Preview: Strong Fourth Quarter Expected

MasterCard (NYSE:MA), which recently ousted Halliburton (NYSE:HAL) from the number 27 spot on the S&P 500, is scheduled to report its fourth-quarter and 2012 results Thursday, January 31 before market open.

Investors will be looking for the company to build on positive earnings and revenue momentum in the quarter that included both the holiday shopping period and the height of fiscal cliff uncertainties.

Expectations

Analysts on average predict that MasterCard will report that revenue for the quarter rose more than nine percent year-over-year to $1.89 billion. Earnings of $4.82 per share are also in the consensus forecast. That would be up from a reported profit of $4.03 per share in the comparable period of last year.

In the past 30 days, that earnings per share (EPS) estimate has ticked up from $4.81. However, analysts have underestimated the company's earnings per share (EPS) results in the past eight quarters. The third-quarter earnings of $6.17 per share beat the street view by more than four percent.

The strong third-quarter results were attributed in part to the company's overseas business, but business grew by virtually every measure. Consumer spending was up, driven by a brightening economic outlook. The company also continued to repurchase shares in that period. But the share price rose only about two percent in the days following the third-quarter report.

For the full year, the analysts' consensus forecast calls for per-share earnings of $22.00 on revenues of $7.39 billion. That would be up from $18.70 EPS and $6.71 billion in revenue in the previous year. That earnings estimate has risen in the past 60 days from $21.96 per share.

The Company

MasterCard provides transaction processing and other payment-related services in the United States and internationally. It has been a publicly traded company since 2006 and was founded in 1966. Its headquarters are in Purchase, New York. The company has a market capitalization near $64 billion. Ajaypal Singh Banga has been the chief executive officer since April 2010 and was previously the chief operating officer.

Competitors include American Express (NYSE:AXP), Discover Financial Services (NYSE:DFS) and Visa (NYSE:V).

American Express posted lower fourth-quarter earnings due to one-time charges, while Visa posted earnings growth but fell short of consensus EPS estimates. Visa is expected to post strong earnings and revenue growth for its most recent quarter when it reports next week.

During the three months that ended in December, MasterCard unveiled its new innovation hub in Dublin, partnered with Telefnica Group to bring mobile payments to Brazil and extended its relationship with the PGA.

Performance

MasterCard has a long-term EPS growth forecast of almost 18 percent, but its price-to-earnings (P/E) ratio is greater than the industry average. The operating margin is greater than the industry average, the return on equity is more than 33 percent and the return on investment is more than 30 percent.

The number of MasterCard shares sold short, as of mid-January, represents about 1.5 percent of the float. That is the highest that the short interest has been in a year.

Of the 34 analysts surveyed by Thomson/First Call who follow the stock, 28 recommend buying shares; 13 of them rate the stock at Strong Buy. The analysts' mean price target, or where they expect the stock to go, represents more than six percent potential upside. That would be a new multiyear high.

The share price has risen more than 12 percent in the past 90 days, despite pulling back a bit in the past two weeks. Shares still are trading more than 47 percent higher than a year ago. The share price is above the 50-day and 200-day moving averages. Over the past six months, the stock has outperformed American Express, Discover Financial and the S&P 500, but it has underperformed Visa.

ACTION ITEMS

Bullish: Investors interested in exchange traded funds invested in MasterCard might want to consider the following trades:

First Trust US IPO Index (NYSE:FPX) is about 32 percent higher than a year ago.
PowerShares Morningstar StockInvestor Core (NYSE:PYH) is about 18 percent higher than a year ago.

Bearish: Traders may prefer to consider these alternative positions in the same industry:

FleetCor Technologies (NYSE:FLT) is up about 75 percent in the past year.
Deluxe Corp. (NYSE:DLX) is up about 59 percent in the past year.