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MasterCard Has More Room to Run in 2014 (Update 1)

Judge Leon ruled in favor of the plaintiffs' argument that the Durbin Amendment required merchants to have multiple choices between unaffiliated payment networks for each debit card transaction, and not only for each card.  "It appears that the [Federal Reserve] Board completely misunderstood the Durbin Amendment's statutory directive and interpreted the law in ways that were clearly foreclosed by Congress," Leon wrote in his decision in August.

The ruling was appealed by the Federal Reserve, and a decision is expected soon.  If Judge Leon's ruling survives all possible appeals, merchants will be required to offer a choice of networks for all debit card transactions, which can only help MasterCard, since Visa has the leading market share.

Outlook for Payment Processors

"We view today's announcement as positive for the stock and supports our view of a growing capital return at MA. We especially like the accelerating level of share repurchases," Citigroup analyst Donald Fandetti in a note to clients late Tuesday.

Fandetti also noted that Tuesdays announcement was "in front of the pending merchant lawsuit that should receive final approval any day now (though will be appealed). 

The analyst rates MasterCard a "buy," with a price target of $835, "based on approximately 27x our 2014 EPS estimate of $31 and 23x our 2015 estimate of $36.60."   Fandetti also pointed out that the stock at Tuesday's close was trading at roughly 20.9 his 2015 EPS estimate, which is "roughly in-line" with earnings growth guidance of >20% CAGR through '15."

KBW analyst Sanjay Sakhrani is even more upbeat about MasterCard, rating the shares "outperform," with a price target of $920.00.  Sakhrani on Tuesday raised his target price for MasterCard from $843, while introducing a 2015 EPS estimate of $36.05.

In a note to clients on Monday, Sakhrani wrote that although "we broadly continue to be overweight the [credit card issuer/payment processor] space, we think it's probably fair to assume that the rate of upside to earnings and (likely) stocks might be more subdued in 2014. That said, we still believe that underlying fundamentals remain strong within the cards/payments space along with leverage to an improving global economy."

For payment processorrs specifically, Sakhrani believes stock performance during 2014 "is likely to be positive, assuming the global economic environment remains stable or improves as the sector should continue to benefit from the global shift towards electronic payments, along with Visa and MasterCard having strong operating leverage and solid cash flow generation. "

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