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

Updated from 10:18 a.m. ET with late morning market action and additional comments on payment processor stocks from KBW analyst Sanjay Sakhrani.

NEW YORK (TheStreet) -- MasterCard (MA) is hot, following a series of shareholder-friendly announcements late Tuesday, and analysts believe the stock has quite a bit more room to run.

The payment processor's shares were up 3.7% in late morning trading Wednesday to $7792.03, following the announcement of a a 10-for-1 split on Jan. 21, 2014, for investors of record as of Jan. 9.  The split "will not result in any taxable income, gain or loss to stockholders,"  according to the company.

MasterCard also announced an increase in its quarterly dividend on common shares to $1.10 from 60 cents.  Following the split, the quarterly dividend will be 11 cents a share.

The company also put in place a new plan to buy back up to $3.5 billion in common shares.  Those buybacks will commence after MasterCard completes its current $2 billion buyback plan, under which the company is authorized to buy back $524 million in shares. 

MasterCard reported net revenue of $6.22 billion for the first three quarters of 2013, increasing 13% from $5.496 billion a year earlier.  Earnings for the first three quarters came in at $2.493 billion, or $20.46 a share, growing from $2.154 billion, or $17.07 a share, during the first three quarters of 2012.  While earnings grew by 16%, earnings-per-share were up 20%, because the company's weighted average share count declined 3%, reflecting share buybacks.

In comparison, Visa (V) -- MasterCard's payment processing rival -- reported a 13% year-over-year increase in operating revenue for its fiscal 2013 ended September 30, while its earnings grew to $4.98 billion, or $7.61 a share, in fiscal 2013 from $2.144 billion, or $3.17 a share, in fiscal 2012.  The 2013 bottom line reflected a tax benefit of $2.277 billion, while the 2012 earnings were hit by $4.100 billion in litigation provisions.

Major Durbin Stakes

MasterCard's stock was up 56% year-to-date through Tuesday's close, exceeding the performance Visa, which was up "only" 33% through Tuesday's close at $199.43.

A major factor in the "drag" on Visa's shares is the lawsuit by a group of merchants against the Federal Reserve of the regulator's implementation of the Durbin Amendment of the Dodd-Frank banking reform legislation.  U.S. district court judge Richard J. Leon in Washington ruled in August that the Fed had "clearly disregarded Congress's statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit transaction."

The Durbin Amendment placed limits on the interchange fees paid by merchants to banks to process debit card purchase transactions. The amendment also gave retailers more freedom to choose which network to use to route debit card payments.

Leaving aside the ongoing arguments about the fees banks may charge to merchants to purchase debit card purchases, the big issue for the payment processors is whether or not "non-exclusivity rules" for payment networks should apply to all debit card purchases, and not just to the ones requiring the customer to input a PIN code.

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. "

"At this point, while we continue to like both companies, we favor Visa over MasterCard given that the recent price-to-earnings multiple differential has widened to a level where MA's premium to Visa is above the historical mean," Sakhrani added.

Sakhrani's price target for Visa is $256, implying 28% upside over Tuesday's close.  Visa's shares were up nearly 2% in afternoon trading, t $203.10.

The following chart shows the performance of MasterCard and Visa this year, against the performance of i the S&P 500 ^GSPC. 

MA Chart
data by YCharts


-- Written by Philip van Doorn in Jupiter, Fla.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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