Mastercard Heats Up On Global Plastic Use

By Greg Sushinsky | November 04, 2010 AAA

Mastercard (NYSE:MA) posted a healthy earnings increase for the third quarter, led by a surge in card use globally. The payment processor saw a jump worldwide in both debit and credit card usage, though U.S. usage fell slightly.

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Debit Card Trend Continues
As consumers try to cut debt and move away from cash and checks, plastic use in the form of debit cards continues to grow. Rival card issuer Visa (NYSE:V), with its larger business in debit cards, now finds debit card use has overtaken credit card use. Mastercard, which saw its domestic debit card use drop by 5% in the quarter due to larger banks switching their card deals to Visa, is otherwise showing this long-term change to debit cards also.

Without Mastercard's lost deals, including at JP Morgan Chase (NYSE:JPM) (via the former Washington Mutual), debit card usage would have increased by 16%. Globally Mastercard's debit card usage increased by 29% in the quarter. The debit card trend is not just intact but is actually still accelerating.

The Quarter's Numbers
Mastercard's net income rose 15% to $518 million or $3.94 a share, compared to $452 million or $3.45 a share in last year's quarter. Revenue rose 5% to $1.43 billion from $1.36 billion in Q3 last year. Mastercard is making the transition to deals with smaller banks such as Sun Trust Bank (NYSE:STI) and Sovereign Bankcorp (NYSE:STD), which will take time to produce positive results. It's unclear whether Mastercard's strategy to fill in their card business with these smaller deals will replace lost card customers and how much growth Mastercard will be able to get from this.

More Trends
In addition to the long-term trend toward more overall plastic use, Mastercard CFO Martina Hund said commercial credit is improving. She also cited improving consumer trends, but the consumer is still being held back by weak U.S. spending and job worries. Emerging markets fueled much of the global increase for Mastercard's business this quarter, as CEO Ajay Banga cited the Asia-Pacific region as particularly strong. Volume and transaction growth in October, after the close on September 30 of the third quarter, is also improving.

Outlook
While Mastercard will continue to pursue its strategy of cobbling together many smaller additional card issuers, rival Visa continues its own outsized growth. Visa's recent outlook called for 20% earnings per share growth in fiscal 2011. Visa also rocketed past expectations in its latest earnings report, with revenue up 13% while earnings soared 51%. Mastercard's strong third quarter, along with the demographic trends of increasing use of plastic and the rapid expansion in global use of cards, shows that the size of the worldwide pie that is the card business still has plenty of room to grow, as the card-brand companies are prospering.

Mastercard Stock
Earnings estimates for Mastercard are also in the 20% range for EPS. Even if these prove too optimistic, compare this to many other struggling industries with their lagging fundamentals. The tide of plastic continues to roll on. Mastercard stock recently traded less than 10% off its 52-week high at a PE of nearly 20, so it still looks pricey, yet its forward PE of 15 intrigues. This is a stock to watch in an industry that will continue in its macro growth spurt for some time.

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