MasterCard Incorporated (MA) reported earnings after the close Monday.  By almost all standards the company beat expectations coming in with earnings of $2.47 per share on revenue of $1.3 billion dollars.  The expectation had been for earnings near $2.25.  The third quarter was characterized by strength during the majority of the period, but management noted a sharp drop in activity mid-September after the Lehman Brothers failure.

While it is certainly encouraging that the company was able to post a strong third quarter, the key for valuing investments is not looking in the rear-view mirror but instead developing an accurate assessment of future earnings.  As such, the conference call concentrated much more on the current environment and management’s assessment of the direction of the global economy.

Management noted that October saw pronounced weakness in the United States.  This presents a significant challenge for the fourth quarter leading into the holiday sales period.  The CEO stated that Americans are cutting back on travel and spending less when they do travel which obviously cuts into the company’s domestic revenue.  On the international side, there is still revenue growth expected albeit at a much lower rate.  Even more importantly, the company is seeing “significantly reduced spending among financial institutional customers.”  These customers are focusing more on risk control by not issuing cards to consumers who have low credit scores or perceived difficulty in repaying loans.

Without a doubt, there are trends that favor MasterCard and its competitors.  Not only are developed countries beginning to see the majority of transactions take place electronically, but emerging markets are driving growth as well.  Since MasterCard does not actually extend credit to consumers, it does not explicitly bear the risk of cardholders defaulting.  Even with the current global challenges, the firm is still expecting to see revenue growth over the next year.  Management also has renewed their focus on expense control which should prop up profitability even if revenue growth is light.

However back in July, Zachstocks issued a cautious note on MasterCard as investor expectations appeared to be too optimistic.  Since that time, the stock has lost roughly 40% of its value and still looks like it could have farther to go.  At this time in the market cycle it is very dangerous to short stocks.  Even after the earnings report, MA is up 11.5% in pre-market trading.  I would not suggest shorting the stock until the market works off its over-sold condition.  However, if the stock rallies closer to the $180 to $200 range, it may present an attractive opportunity to short.  Economic weakness will likely pressure earnings more than expectations, and the current price still discounts a robust view of the company’s earnings power.

MA Notes
FD: Author does not have a position in MA

Additional Reading:
Kim Peterson compares Visa, American Express and Mastercard