MA Looks Good, but Recession Still Looms

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

Adjusted for a $516 million payment to Discover (DFS - commentary - Cramer's Take), MasterCard (MA - commentary - Cramer's Take) reported earnings of $2.47 per share, which beat Street EPS estimates of $2.22 and bettered last year's EPS of $2.32. Revenue adjusted for currency effect was up 20%, to $1.34 billion, 2.5% greater than expected. Price changes were 5% of revenue growth for a net of 15% organic growth, flat with the second-quarter comparison.

Gross dollar volume was up 12.3%, and purchase volume in local currency rose 13.3%. Cross-border volume, a high-margined revenue source, rose 18%. Transactions rose 13%. Net revenue/gross dollar volume was 20 basis points, up 1 basis point on a linked-quarter basis. Cards outstanding rose 10%.

Underlying operating expense net of currency rose 6%. Advertising and promotion expense net of currency declined 2%. The adjusted operating margin was 41.0%, an 8.4% gain from last year.

So, it was a great quarter from higher revenue and expense control, and the stock responded, going up 8%, to $155, in after-hours trading, but the recession that the Street was worried about is upon us, and management understandably had no idea where it would lead. The first four weeks of October saw cross-border growth down to high-single-digit percentage revenue gains. Client banks are reducing expansive types of spending, and this is expected to continue through 2009.

This year will show revenue growth in the 12% to 15% long-term range if currency rates do not move, but 2009 will see the brunt of the slowdown. Net revenue will be below the 12% to 15% objective. Management's best expectation, which it does not know if it will achieve, is high-single-digit net revenue growth and three to five percentage points of margin expansion, resulting in 20% to 30% earnings growth against a currency headwind in 2009. Operating expenses will be flattish.

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At the time of publication, Thomas had no positions in the stocks mentioned.