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MasterCard Mastery Short-Lived

Shares sink on worries that the easy money has been made.

Updated from 10:41 a.m.

The run-up in


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

shares screeched to a halt Friday after the credit card processor warned of a 2007 slowdown.

The stock tanked 9% to $104.50 on Friday.

The Purchase, N.Y., company made $41 million in the fourth quarter, or 30 cents a share, reversing the year-ago loss of $53 million, or 39 cents a share. Revenue rose 17% from a year ago to $839 million.

Excluding certain costs, earnings were 31 cents a share. Analysts were looking for a profit of 17 cents a share on sales of $826 million.

MasterCard had hit a 52-week new high of $118 after blowing out fourth-quarter earnings estimates, but the euphoria was short-lived as investors soon turned to worrying about the company's margins.

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"If you look at revenue growth and you strip out the 5 percentage points in the fourth quarter that they got from the pricing initiatives they put in place in April that won't repeat themselves next year,


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actually exceded their revenue growth number with lower

gross dollar volume growth," says Craig Maurer, an analyst at Soleil Securities who rates the stock hold. "I'm not arguing to sell MasterCard -- I am just saying look at the valuation gap. So what the stock is doing today is no surprise to me because I have been trying to warn my clients that assumptions for margin expansion are just not founded."

Gross dollar volume rose 13.8%, on a local currency basis, to $532 billion. Transactions processed rose 17% to 4.4 billion. Worldwide purchase volume rose 16.7%, on a local currency basis, during the quarter to $391 billion, driven by increased cardholder spending on a growing number of MasterCard cards. Customers had issued 817 million MasterCard cards at year-end, up 12% over a year ago.

"Cardholders around the world used their MasterCard cards for transactions totaling almost $2 trillion in 2006 -- doubling the GDV we reported only five years ago, as the pace at which we are driving commerce in markets around the world gains momentum," said CEO Robert W. Selander. "Our success in displacing paper-based forms of payment reflects the strength of our brand and network as well as the opportunities to implement innovative payment programs in both emerging and developed economies."

Excluding the impact of litigation settlements, operating expenses increased 0.5%. This was primarily driven by a $14.5 million cash contribution to the MasterCard Foundation, as part of MasterCard's previously disclosed intention to contribute up to $40 million in cash to the foundation over four years; higher professional fees related to legal costs to defend outstanding litigation; and an increase in personnel costs related to the hiring of additional staff.

"I think a lot of investors are getting out saying the story is played, we made our fast money," Maurer says. "I am a huge fan of this business in general. You have such huge secular momentum behind this that you can't argue with the value of what they are doing, but margin improvement will be tempered."