MasterCard charges back to profitability

MasterCard (MA) looks to be charging back to stability sooner rather than later.

The company swung to profitability in the third-quarter thanks to cost cuts and a slowdown in the rate of decline in consumer spending. Now if consumers would just start spending a smidge more, the company could generate some compelling growth.

Like rival Visa (V), MasterCard doesn't make loans, meaning it's been insulated from rapidly souring consumer debt. Rather, it just processes transactions. The more folks use its cards, the more fees it collects. It's hard to see U.S. consumers going on a spending spree anytime soon, but that's not the same case for shoppers overseas.

"MasterCard appears ideally positioned to benefit from resurgent global payments volume," wrote SunTrust Robinson Humphrey analyst Andrew Jeffrey in a note to clients last week. "Although a U.S. recovery may lag the rest of world, nascent signs of domestic stabilization, rebounding international demand, a growing [foreign-exchange] tailwind and a rational cost structure should translate into 20%-plus 2010 and 2011 EPS growth."

The analyst, who has a buy recommendation on the stock, also likes the company's leverage to Europe, domestic discretionary spending and cross-border volume.

Shares currently trade in line with the broader market on a forward earnings basis, despite having much more robust growth prospects, according to Thomson Reuters. They also offer a discount of about 18% to their own five-year average. Those sorts of figures suggest that shares, at about $238 a pop, are a bargain these days.

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