Earnings Preview: MasterCard Poised for Moderate Growth

Credit card outfit MasterCard (MA) likely saw a small bump in fee collection in the fourth quarter, which should translate into higher earnings when the company reports earnings on Thursday morning.MasterCard's Spending Pulse data offers a glimpse on how consumers are spending, and the data showed that the recent holiday shopping season saw a small uptick. Retail sales, as tracked by Spending Pulse, increased 2.1% in September, 2.4% in October and 3.6% for the combined November-December period, compared to the previous year.

'Strong Holiday Volume'

"Strong holiday volume gives hope that the full quarter growth was higher," noted Bruce Harting, an analyst at Barclays Capital. Analysts polled by Thomson Reuters estimate MasterCard's fourth quarter earnings to come in at $2.46 a share on revenue of $1.3 billion.

Like its larger rival Visa (V), MasterCard has been insulated from the credit woes of the customers that use credit cards. MasterCard and Visa get a set fee for processing each payment, rather than being on the hook for the credit-card loan. Still, the Purchase, N.Y., company could be hurt from consumers cutting back spending, and also the fact that many issuers have cut back the number of credit cards.

"We continue to have concerns about the health of the consumer as reflected in spending trends," said Robert Selander, CEO of MasterCard, in a conference call to discuss the previous quarter's earnings.

Luxury Goods Sales Boost

Selander and his team closely watch for signs of luxury goods sales picking up. That's because MasterCard relies more on consumers buying big-ticket discretionary items like electronics or jewelry, for which they normally use a credit card. Rival Visa has a higher market share in debit cards, which are used more frequently by consumers for non-discretionary purchases.

So, it's likely good news that in December, sales of luxury goods increased 5.5%, while jewelry sales, which were up 6.9%, posted their fourth consecutive monthly sales increase, according to Spending Pulse.

Barclays' Harting notes that MasterCard could also see revenue growth in coming months from an increase in fees that it charges merchants. He expects higher gas prices in the fourth quarter could also lift revenue.

Large Debit Card Portfolio Moves

Tien-tsin Huang of JP Morgan equity research says that one big drag on MasterCard is the loss of a large debit card portfolio from Washington Mutual, which is moving to Visa. WaMu was taken over by JP Morgan Chase last year.

"The WaMu debit portfolio generates roughly $40 billion in annual purchase volume," notes Huang. "We believe 70-80% of this portfolio will gradually convert to Visa beginning some time in early 2010." Huang expects this loss to reduce MasterCard's earnings by as much as 15 cents to 20 cents a share in the coming year.
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