Why MasterCard Must Take Charge to Overcome Long-Term Growth Risks

NEW YORK (TheStreet) – With worst-than-expected results coming out from Visa (V), investors in MasterCard (MA) paid dearly on Friday for what is called in the market as "tandem trading."

MasterCard stock is around $76, down 9% on the year to date. Investors don't mind locking in gains ahead of the company's earnings report this week. After all, shares of MasterCard have paid investors well, soaring close to 300% over the past five years. MasterCard will announce financial results Thursday.

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As we've seen from Visa, whose shares lost more than 3.5% Friday, why take the chance with all of these gains on the table? Visa credit cards might be "everywhere you want to be" but the stock is not because of geopolitical issues including sanctions on Russia affecting card processing volumes. MasterCard is no exception. Investors would be wise to get out now while there's still time.

From a fundamental perspective, MasterCard's stock, which trades at a trailing price/earnings ratio of 28, is not cheap. When looking at the stock based on next year's earnings estimates of $3.60, these shares still trade at a P/E of 21, which is seven points higher than the industry average P/E of 14. Even on the most bullish assumptions, the stock would be fairly priced on next year's estimates. This means there is no point to bidding up the shares today with geopolitical risks on the table.

In that regard, in 2013 the company processed 53 billion transactions totaling $4.1 trillion. Trailing only Visa, MasterCard has nearly 1.3 billion credit and debit cards in circulation and is accepted at over 30 million locations. One of these locations happens to be Russia, where sanctions are likely to affect the company's earnings in the coming quarters until a resolution is reached.

What management says during its conference call about ongoing payments regulation changes in Russia is what will drive the stock. The Russian parliament, in April, passed a new law that forces both MasterCard and Visa to pay a security deposit of 25% of their average daily turnover in Russia to the central bank. And they have to do this once every quarter. The new law becomes effective Oct. 31 of this year.

Visa took the hard stance and ended its relationships with two Russian banks in April, which caused weakness in its cross-border payment volumes. This was one of the reasons Visa's earnings disappointed investors Friday. The question his, how will MasterCard react?

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If the MasterCard is unable to meet Russian demands, like Visa, it will be shut out of the Russian payment landscape. Unlike Visa, MasterCard seems open to accept the terms offered by the Russian Central Bank. In June, management sought proposals from local Russian payment processors in search for potential partnerships. This could be an encouraging sign.

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