Charged up over MasterCard (MA)
"In this recession, consumers are spending less per purchase on their credit cards -- but that hasn't slowed down the credit card company MasterCard (NYSE: MA)," says Paul Tracy.
In his The StreetAuthority Market Advisor, he points out, "In the second quarter, MasterCard's net income grew by +26%, beating Wall Street's expectations by a significant margin." Here's his review.
"MasterCard makes its money from the fees it charges merchants and the banks that issue its cards. The issuing banks make money by charging consumers interest.
"And as we've seen, the banks can lose money when consumers default on their credit card debt. But MasterCard's fee-based business model has been relatively resilient during the downturn.
"People are still using their credit cards. In fact MasterCard reported credit card transactions were up +7.9% in the second quarter.
"And although the dollar value of the transactions was lower by -9.3%, much of the decline was offset by the higher transaction fees MA in instituted back in April.
"MasterCard's net revenues were up just +2.7%. But by cutting administrative and marketing costs by -23.4%, the company not only increased profits but grew its operating margin from 33.4% to 43.5%, excluding one time charges.
"In its recent earnings announcement, the company said it would be difficult to meet a previously set revenue growth target of between +12% and +15% for the 2009-2011 period. But after seeing MasterCard's ability to control costs, my staff and I are less concerned about slower revenue growth.
"And brighter days may already to be at hand. The company noted that cross-border transactions seem to be stabilizing going into the third quarter. While this might be anecdotal, MasterCard's observation coincided with reports that GDP is rebounding in larger European countries like Germany and France.
"MasterCard skillfully navigated the worst of the global recession and appears to be sailing in smoother seas. While consumers may keep their spending in check for the foreseeable future, MasterCard's higher fee structure should mitigate any continued weakness. We believe MasterCard is a solid buy under $225 per share."
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