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MasterCard's Lofty Expectations

Will the fourth quarter be priceless?

Investors will get a chance Friday to check in on


(MA) - Get Mastercard Inc. (MA) Report


The credit card giant has had a great run. Shares have more than doubled since last spring's $2.4 billion initial public offering, including a 12% rise for 2007.

But now the pressure is on the Purchase, N.Y., transaction processor to outdo itself -- and not everyone is sure it can. The company's hefty burden will be on display Friday morning, when MasterCard is scheduled to post fourth-quarter earnings.

Gregory Smith, an analyst at Merrill Lynch, does not expect to "see anywhere near the upside that MasterCard reported during its first two quarters as a public company," in the second and third quarters of 2006.

MasterCard beat estimates by 7 cents a share in the second quarter and 35 cents in the third quarter.

"Even though we estimate that MasterCard can grow earnings somewhat faster than its peer group over the next few years, its stock is now trading at a premium multiple, which signals to us that expectations are already high for earnings growth," wrote Smith, who rates the stock neutral.

MasterCard's revenue growth is "being moderated by customer demand for better pricing arrangements and increased rebates and incentives," says Smith.

Analysts expect the company to report that it made 17 cents a share for the fourth quarter on revenue of $827 million.

Sanjay Sakhrani, an analyst at Keefe Bruyette & Woods, says that each time MasterCard renews a payment contract, "there is risk that the terms aren't as favorable."

MasterCard's five largest clients make up one-third of its total revenue, but the company has been increasing rebate fees to customers and losing market share for the past three years as other competitors become more aggressive in targeting customers.

In addition, the payments industry is consolidating as MasterCard's rivals continued to get gobbled up by large banks. In recent years,

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"Much of MasterCard's success rests on the shoulders of its partners' executing on their card product offering and successfully signing up bank customers," Sakhrani wrote in a note when he initiated coverage on the stock in December. "These larger players have greater leverage to negotiate discounts with MasterCard which could lead to pricing pressure."

In addition, MasterCard is involved in at least two high-profile legal cases. One involves a merchant lawsuit over so-called credit card interchange rates. The other is an antitrust suit from

American Express

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and Discover.

"The trend has been towards declining margins," he says. "They look to offset margin compression on the top line with volume growth, but it's not a sort of one-to-one offset." Sakhrani rates the stock underperform.

MasterCard is a "good company," he adds. But key swing factors include merchant rebates and marketing expenses.

Analysts are predicting MasterCard's marketing expenses to be lower than in the year-earlier period, while merchant rebates should be about the same.

This year, competitive pressures are likely to intensify, he says.

Discover Financial Services is in the process of being spun off from

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. Credit-card-payments rival Visa has made its intentions clear that it wants to go public.

"There is going to be this battle for capital," Sakhrani says. "Investors are going to have to pick and choose." He says the competition is likely to hurt MasterCard's revenue growth.

Sakhrani also worries about how MasterCard's stock could respond to "any negative news flow," he says. "Until now its been very positive for them."