MasterCard Misses Estimates, Even With Higher Volume

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MasterCard (MA) racked up higher transaction volumes in the fourth quarter due to increased consumer spending, but it still disappointed Wall Street by missing expectations. The world's second-largest payments network reported that net income grew 23% to $294 million, or $2.24 a share, while revenue increased 6% to $1.3 billion. Analysts polled by Thomson Reuters had expected earnings of $2.46 a share. The results included an after-tax severance charge of 19 cents a share.MasterCard stock is taking a beating in mid-morning trading, down 7.5% to $229.

As expected, MasterCard's revenue was helped by better holiday spending compared to 2008. Its most recent Spending Pulse data, which provides a glimpse on spending trends, found that in December, sales of luxury goods increased 5.5%, while jewelry sales were up 6.9%. That helped boost MasterCard's processed transactions in the fourth quarter by 6.7%.

Losing Out to Visa

MasterCard relies on a pickup in consumer spending on big-ticket discretionary items such as electronics or jewelry, for which people normally use a credit card. During the economic downturn, because buying of such items has fallen much more sharply, MasterCard has been hurt more than rival Visa (V), which posted stellar results on Wednesday. Visa has a higher market share in debit cards, which consumer use more frequently for nondiscretionary purchases.

Robert Selander, CEO of MasterCard, said the company's internal research shows that consumers are trying to spend selectively. "A new mindset seems to be emerging where people are looking for opportunities to spend while trying to balance the temptation to consume due to the realities of the environment," said Selander, in a conference call to discuss earnings.

MasterCard also saw revenue grow from an increase in fees that it charges merchants. However, neither that nor improved consumer spending were enough to offset a severance charge and loss of income from rebates and incentives to renew agreements with its customers in the fourth quarter.

Lower Limits and Fewer Cards

MasterCard is also dealing with the fact that banks have cut back credit cards in an effort to preserve capital after the financial crisis. Large banks that issue cards have also reduced credit limits, which has curbed consumer spending and directly affected MasterCard's transaction fees. As of Dec. 31, 2009, the banks had issued 966 million MasterCard cards, a decline of 1.3% from a year earlier.

MasterCard is also in the process of losing Washington Mutual's large debit card portfolio to Visa. WaMu was taken over by JP Morgan Chase (JPM) last year. Tien-tsin Huang of JP Morgan equity research says the WaMu debit portfolio generates roughly $40 billion in annual purchase volume, much of which will be gone at the end of the year.
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