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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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October 15, 2007 12:01 AM ET
MasterCard's performance since it went public last year has been—to put it mildly—priceless. In just 16 months, shares of the credit card giant have more than quadrupled. In recent weeks, however, cracks have begun to appear in the company’s rosy profit forecasts, and bears have begun betting that Master¬Card shares could be on the verge of a sharp decline. “The company faces a lot of difficulties that are being ignored right now,” said Zachary Scheidt, a portfolio manager at Piedmont Investment Advisory in Atlanta, who sold MasterCard short earlier this year and is looking to do so again. Looming largest on the horizon are worries that the meltdown in the housing market will depress consumer spending and, more specifically, charge-card use. The Purchase, N.Y.-based card network faces growing scrutiny from regulators over the rates it charges merchants. MasterCard also faces legal challenges from rivals including American Express, which accuse it and Visa of monopolizing the market. Those problems are cropping up at a time when MasterCard is clearly at the top of its game. It continues to steal market share from that old has-been, cash, with its massive network, which processes more than 30,000 transactions every minute of every day. That volume equates to better than 25% of the more than $5 trillion in worldwide credit and debit-card spending each year. That market share pays handsomely. In the first half of the year, MasterCard posted $467 million of net income, or $3.42 a share, on revenue of $1.9 billion, a vast improvement over last year, when results were bogged down by initial public offering costs and the company posted a $184 million loss on $1.6 billion of revenue. Analysts surveyed by Reuters Fundamentals expect earnings to grow by a stellar 20% next year. “MasterCard occupies one of the sweetest spots in banking imaginable,” said Red Gillen, an analyst at research firm Celent. “So long as people spend more, it will benefit.” The problem is that earlier assumptions of continued heady gains in consumer spending—and in MasterCard’s revenue—are looking increasingly outdated. With big retailers like Target and Lowe’s issuing profit warnings in recent weeks and consumer-confidence readings slipping, fears of a broad economic slowdown are mounting. Meanwhile, the company is also encountering stiffer headwinds overseas, where it generates half of its revenue and the bulk of its growth. In a recent regulatory filing, MasterCard warned that as early as this fall, the European Union will probably order the company to substantially reduce the commissions it charges merchants on cross-border transactions, typically 1.5% of the purchase price. Such a cut, MasterCard has warned, could “significantly impact” its business in a market that grew by 25% in the first half of 2007——twice the pace of the U.S market. Legal challenges are also mounting at home. U.S. merchants have sued MasterCard and Visa over the rates they charge. This summer, the Justice Department began looking into the matter. MasterCard, which declined to be interviewed for this article, has said that it is not a focus of the probe. Next September, however, MasterCard will very much be in the spotlight when a suit brought by American Express, charging MasterCard, Visa and several big banks with anticompetitive practices, will come to trial. A Bear Stearns analyst recently reckoned that judgments or settlements from such actions “could absorb much or even all of the company’s excess cash.” As of mid-year, MasterCard had $1.5 billion in cash and equivalents on its books. The real danger for MasterCard shareholders is that the stock is priced as if all these threats did not exist. The shares trade at a hefty multiple of 27 times projected 2008 earnings, miles ahead of American Express’ multiple of 15 and Discover’s 12. As if all that weren’t enough, MasterCard will soon lose its status as the world’s largest publicly traded charge-card company. Visa, jealously eyeing its rival’s success, is preparing to go public early next year. Visa is not only larger, but also more profitable, sporting operating margins of 35% compared with MasterCard’s 30%. That could well persuade investors looking to dabble in the booming card business to put their chips down on MasterCard’s more productive rival. —Crain’s New York Business
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