MA Lowers Expectations

For Rothbort's preview heading into the MasterCard conference call, please click here.

MasterCard (MA - commentary - Cramer's Take) shares are sharply lower despite the company exceeding analyst estimates. The reason stems not from the litigation losses but rather from management's guidance to lower levels of growth for the rest of 2008.

Clearly, the stock was too pricey when it traded above $300. Given the current U.S. economic environment, MasterCard is more fairly priced in the mid $200s, which is exactly where the market has it.

International growth is still strong, but there is a risk that international will slow down as well. On the other hand, lower gas prices and an improving economy could be the next tailwind that MasterCard is seeking.

In the end, there is no doubt that, as a global society, we are moving toward a more plastic lifestyle. At these levels, MasterCard is a hold, as I think the opportunity to sell the stock was a few weeks ago.

The company reported a quarterly loss of $5.74 per share, which included a $1.0 billion after-tax charge for an antitrust litigation settlement with American Express (AXP - commentary - Cramer's Take). Excluding that charge, MasterCard earned $2.11 per share. Net revenue for the quarter was $1.25 billion.

Currency fluctuations accounted for 5.4% of revenue growth. Operating margins improved 610 basis points, to 33.4%.

Some credit card processing metrics (all year over year):

• Cross border volumes grew 18.9%.
• Gross dollar volumes (GDV) rose 12.8% in total. In the U.S., GDV rose only 6.2% because of the slowing economy. In the U.S., credit card GDV rose 0.7%, while debit card GDV jumped 15.8%.
• Worldwide purchase volume was up 14% on a local currency basis, and cash volume growth was up 9.3%.
• Process transaction growth was 7.8%.
• Data indicate that there is an increase in sales of staples (i.e., gasoline, food and health care) due to rising prices.
• The company is seeing double-digit growth in markets outside the U.S.

Litigation update:

• Under the agreement with American Express, MasterCard will pay $150 million per quarter for 12 quarters, not to exceed $1.8 billion.
• In the Discover (DFS - commentary - Cramer's Take) case, MasterCard entered a judgment-sharing agreement with Visa (V - commentary - Cramer's Take) that apportions costs and liabilities to both companies; Visa will be responsible for a majority of any judgment and liabilities.

MasterCard repurchased approximately 1.3 million shares for $355 million during the quarter. The company ended the quarter with $2.7 billion in cash and equivalents, and $80 million of subordinated debt was repaid.

Looking forward, MasterCard expected slower growth than the 22.3% it produced in 2007. Growth is still expected in double digits. Lower U.S. net revenue growth is expected for the rest of the year.

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At the time of publication, Rothbort was long MasterCard and Visa, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.