MasterCard Suffers a Growth Slowdown

CEO Ajay Banga. Image: MasterCard.

Card-network giant MasterCard has done a great job of fending off the downward impact of poor economic conditions in a number of areas of the world, finding ways to encourage spending and boost its overall take in the payments space. Going into Wednesday morning's second-quarter financial report, MasterCard investors were fairly confident that those positive trends would continue, even as they wondered whether the card company would be able to sustain the same rate of growth indefinitely. MasterCard's results confirmed some of those concerns, with sluggish revenue growth leading to earnings that failed to top the consensus forecast for the first time in more than a year. Let's take a closer look at MasterCard and whether its future is truly cloudier now than it was in the past.

MasterCard deals with tougher conditions worldwideGrowth didn't disappear in MasterCard's second-quarter results, but it moderated substantially from past quarters. Revenue of $2.39 billion was up just 0.9% from the year-ago period, failing to meet even the modest 1.5% growth rate that investors had wanted to see. MasterCard did manage to meet expectations on the bottom line, with net income of $965 million after making allowances for the impact of a merchant litigation settlement in the U.K. market. That worked out to $0.85 per share in adjusted earnings, up 6% from last year's second quarter.

As we've noted repeatedly in past quarters, MasterCard's currency-neutral results looked a lot better, although even they were somewhat weaker on some key metrics. Adjusted for the dollar, sales rose 7%, down a percentage point from last quarter, and cross-border volumes were up 17%. Dollar-adjusted growth in gross volume and processed transactions both weighed in at 13%, with MasterCard processing 12 billion transactions and doing $1.1 trillion in volume during the period. Purchase volumes worldwide jumped 12% to $841 billion, with card counts remaining steady at 2.2 billion.

Once again, MasterCard showed how adept it is at reaping financial rewards internationally. Purchase-volume growth rose at rates of 15% or better in local-currency terms throughout the company's four international segments, more than doubling the 7.1% growth in U.S. purchase volume. In terms of gross dollar volume, MasterCard already gets more than two-thirds of its business from outside the U.S., and that trend shows no signs of slowing.

Still, one concern for MasterCard came from the expense side of the income statement. Operating expenses soared by more than 15% from year-ago levels, and even after taking out the impact of the U.K. settlement, cost increases that come close to 10% were a reversal from the progress MasterCard had made in containing costs in previous quarters.

MasterCard's strategic plan continues to move forward in the eyes of executives. As CEO Ajay Banga said, "We are executing on our strategy to grow our business by focusing on winning new deals in our core payments business, while building out our data analytics, processing and safety applications." Banga also noted that internal investment and acquisition-based growth are both components of MasterCard's future success.

Can MasterCard get back to faster growth?Still, MasterCard will have to demonstrate that it can keep finding opportunities to bolster its growth. The company said that acquisitions added about two percentage points to its revenue growth during the quarter, which means that on an organic basis, revenue from continuing internal operations actually fell in U.S. dollar terms. Most investors believe that the dollar's gains can't continue indefinitely, and once negative currency impacts start to lesson, more of MasterCard's growth should flow through to its top and bottom lines. Yet there's no way to know when the forces that have strengthened the dollar will start to reverse themselves.

Nevertheless, MasterCard believes its stock remains a good value. The company bought back 9 million shares during the quarter, spending almost $850 million, and it said that it has thus far bought back another $182 million in shares during the first three weeks of July. With $2 billion remaining for stock buybacks under its current authorization, MasterCard has plenty of firepower to support its stock.

MasterCard investors weren't happy with the company's results, with the stock falling nearly 3% in the first half-hour of pre-market trading following the announcement. Yet for long-term investors, the return of growth that could come from dollar stabilization might well make a small decline in share price look like a bargain opportunity.

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