MasterCard Rides the Spending Surge to Solid Earnings

Image source: Flickr user Hakan Dahlstrom.

Most investors see card network giant MasterCard as a financial company, yet for more than nearly every other portion of the financial industry, the fortunes of MasterCard and rival Visa are linked to the financial health of consumers across the world. When consumer spending is healthy, MasterCard and Visa tend to do well, and going into Thursday's third-quarter financial report, MasterCard investors hoped that their company would be able to bounce back after disappointing performance during the second quarter raised concerns about its future growth trajectory.

MasterCard's third-quarter results weren't entirely free of worries, but the company nevertheless posted better figures on its bottom line than most investors had expected as spending levels rose worldwide. Let's look more closely at how MasterCard did this quarter and whether investors should breathe a sigh of relief at its results.

MasterCard overcomes continuing dollar headwinds To be fair, MasterCard's third-quarter results didn't blow away anyone's projections of how well it would do. Revenue came in at $2.53 billion, up 1.6% from the year-ago period and roughly in line with what investors had expected to see. GAAP net income actually fell nearly 4% to $977 million due to a $50 million pension-related charge, but after allowing for that item, adjusted earnings of $0.91 per share were $0.03 higher than the consensus forecast among investors.

The strong dollar had a sizable impact on MasterCard's results, as it has in past quarters. Revenue took a hit from the strong dollar of10 percentage points, and earnings per share would have risen by 11% using currency-adjusted numbers. Cross-border volumes rose 16%, with gross dollar volume climbing 13% in local-currency terms to $1.2 trillion. Total processed transactions climbed 12% to 12.3 billion, and worldwide purchase volume rose 12% on a currency-adjusted basis to $852 billion. The number of MasterCard cards held flat at 2.2 billion.

Looking at its geographical segments, the card network fared well in all markets when you factored out the U.S. dollar's influence. In all four arenas, MasterCard enjoyed local-currency growth in gross dollar volume and purchase volume of between 14% and 19%, with remarkably consistent performance across the world. Currency impacts had the biggest effect on Latin America, where dollar-denominated gross dollar volume fell 15%, while the Asia-Pacific, Middle East, and Africa segment posted gross dollar volume growth of 3% despite the foreign-currency hit. The U.S. market once again lagged behind MasterCard's international business, although gains of 7.5% to 8% in both gross dollar volume and purchase volume were slightly faster than in the second quarter.

MasterCard's operating expenses continued to outpace revenue growth, with general and administrative costs climbing almost 13% from year-ago levels. The one-time pension costs likely added to those expenses, though, and the company did well to cut advertising and marketing costs by nearly 10%.

CEO Ajay Banga celebrated MasterCard's performance. "We are pleased with the results we delivered this quarter," he said, "in spite of the ongoing uncertainty in the global economy." Banga pointed to the rise in digital transaction volume as a long-term driver of innovation, which he believes will bolster its business in the long run.

Can MasterCard get back to faster growth?In particular, MasterCard sees several new technologies having an impact on its future business. The MasterPass digital wallet is designed to integrate digital payments more seamlessly into the checkout process, while EMV chips and biometrics have started to enhance security. As rivals move forward with alternatives to credit cards, both MasterCard and Visa will have to work hard to fend off competition from outside the traditional card network industry.

Still, MasterCard will need to make sure that it doesn't start to fall too far behind Visa in terms of growth. Investors expect strong revenue growth from Visa, with 10% gains in sales translating to more than 15% growth in earnings for Visa's 2016 fiscal year. MasterCard's recent results haven't kept that pace, although investors are optimistic that it can speed up its growth next year and as macroeconomic conditions become more favorable.

MasterCard investors seemed largely content with the company's results, as the stock only eased downward slightly in pre-market trading following the announcement after a nice gain the previous day. For long-term investors, MasterCard's past success has come from its ability to tap into global growth, and if it can continue to do so, then more positive results should follow in time.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends MasterCard and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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