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MasterCard's Priceless Quarter

Earnings surge, setting off a furious rally in a hot stock.

Updated from 10:07 a.m.


(MA) - Get Mastercard Incorporated Class A Report

blowout third-quarter earnings report makes it clear why the credit-card giant's bigger rival Visa also is eager to go public.

MasterCard shares surged Wednesday after it posted an 82% gain in third-quarter profit - its first full quarter as a public company. The company's stock has almost doubled in just less than six months on the market.

The Purchase, N.Y., company made $193 million, or $1.42 a share, compared to $106 million, or 79 cents a share, in the third quarter last year.

Revenue rose 14%, to $902 million. Expenses fell 2.6% to $627.2 million, partially from lower spending in marketing and advertising, the company said.

Analysts, as surveyed by Thomson Financial, predicted that MasterCard would earn $1.07 a share on $871.2 million of revenue.

Shares had gained $11.90, or 16%, to $86 in the first half of the day.

The company attributed higher revenue growth to gross dollar volume, which increased 15% to $502 billion. It also had an 18.9% increase in the number of transactions processed and a restructuring of cross-border transaction fees implemented in April.

MasterCard said worldwide purchase volume rose 17.2% to $365 billion, driven by "increased cardholder spending on a growing number of MasterCard cards."

"While the U.S. remains our largest region in terms of volume and revenue, regions outside of the U.S. ... are growing at a faster rate demonstrating the global strength of our business,'' says MasterCard CFO Chris McWilton, speaking on a conference call with analyst.

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Latin America and Europe are two areas with particularly high growth trends, McWilton says.

MasterCard completed an initial public offering in May, in which its shares were priced at $39 each, and raised $2.4 billion.

The credit card giant's third-quarter earnings results could mean big gains for its largest rival, Visa, which has indicated that it plans to also go public. Visa said last month that it plans to

move toward an IPO after the San Francisco credit card provider completes a restructuring of its operations.

The new Visa Inc. will be created through a series of mergers involving most of its international operations.

But Visa's plan to leave part of its European operations out of the windfall it will gain from the IPO could be a mistake.

MasterCard "had an exceptional EPS number driven by the significant shortfall in marketing expense plus some addition revenue growth that was unexpected," says Craig Maurer, an analyst at Soleil Securities. "Visa might miss some of the growth" because the division will not be a part of the new company.

Visa Europe will remain a membership association, owned and governed by its European member banks, and become a licensee of Visa, the company says.

Maurer is concerned that shares of MasterCard will become overheated, particularly after today's stock run up. "The valuation is getting a bit frothy," Maurer says.

Indeed, MasterCard cautioned that fourth quarter results are unlikely to sustain the strong earnings growth seen in the third quarter.

McWilton characterizes the fourth quarter as typically MasterCard's period of "lowest profitability."

"Our fourth quarter revenue is typically offset by an increase in rebates and incentives to merchants and issuers," he says. "Fourth quarter is also a period of heavy advertising and marketing spend."