Financial Sector Ideas

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>>> Mastercard Stock Is Having Its Worst Day Since March. Earnings Were Worse Than Expected.


By Daren Fonda

Oct. 28, 2020


https://www.barrons.com/articles/mastercard-stock-is-falling-as-earnings-fall-short-of-forecasts-51603897285?siteid=yhoof2


Mastercard’s revenue and profit for the third quarter came in lower than expected as cross-border card transactions—a key profit driver—remained severely depressed due to the pandemic and border closures.

The stock was down 6% in morning trading, marking its worst day since March 20.

Payment processing company Fiserv (ticker: FISV), meanwhile, reported a solid quarter, sending its stock up about 2% in early trading.

Mastercard (MA) reported revenue of $3.8 billion, down 14% from a year ago, and 3% less than Wall Street had expected. The firm reported adjusted earnings of $1.60 a share, down 26% year over year, missing estimates for $1.65.

One big hurdle for Mastercard is cross-border transactions, which generate higher margins than domestic transactions and are a key driver of earnings. The dollar volume of cross-border transactions was down 36%, due largely to a steep drop in travel-related activity. Fees on cross-border transactions totaled $791 million in the quarter, down 48% from a year earlier.

Cross-border volume overall is down 29% year to date, pressuring Mastercard’s revenue and profit, both expected to fall this year compared to 2019.

Mastercard CEO Ajay Banga said in a statement that the company is “seeing encouraging progress in the trajectory of domestic spending, while travel spending remains a challenge.” He added that Mastercard is winning new business in core payments and making progress in digital payments and other growth areas.

Barron’s has been positive on payment companies such as Mastercard, Visa (V), and PayPal (PYPL). The pandemic is accelerating a shift from cash to cards and digital payments. But Mastercard’s results imply that international transactions remain a source of weakness as border closures and travel restrictions keep businesses and consumers largely homebound.

Mastercard’s results actually showed improvements from the second quarter, noted Cowen analyst George Mihalos. All key metrics improved slightly, he wrote, including cross-border transaction volumes, which picked up in the last few weeks of October.

Still, cross-border volume outside the European Union was down in the mid 40 percentages in October, year over year, as in-person transactions slumped due to tighter Covid restrictions, noted Jefferies analyst Trevor Williams.

The volume of U.S. transactions “switched” by Mastercard—industry terminology for purchases authorized, cleared, and settled—may also have gotten a bump from Amazon Prime Day, which was later this year, along with government disbursements to consumers. Normalizing for those effects would have dented switched volumes by about two percentage points, he added.

Mizuho analyst Dan Dolev noted that the cross-border recovery isn’t occurring nearly fast enough to meet estimates. While the improvement in the third quarter was above the lows of July, down 39% year-over-year, the decline in late October “is still dramatic and hurts growth.”

Wolfe Research’s Darrin Peller urged investors to stick with the stock, however, despite the near-term weakness. The company’s structural position should be stronger on the other side of the pandemic, he wrote, benefiting from greater e-commerce and digital transactions, accelerating contactless payments, and strong demand for services such as data analytics, cybersecurity, and business payments to employees and contract workers.

Peller maintained an Outperform rating on the stock.

Fiserv, meanwhile, reported a rebound in revenue growth as its merchant acquisition business—running payment systems for retailers and other merchants—grew 6% in the quarter. The company also made headway with Clover, a rival point-of-sale system to Square (SQ) for small businesses.

Fiserv stock is down about 16% this year, due to concerns about a broad retail slowdown and ongoing weakness in merchant acquiring. MoffettNathanson analyst Lisa Ellis noted that the stock is “stuck in purgatory” as investors digest the path of the pandemic. But she raised her estimates for 2021, and outlined factors that could get the stock moving, including gains in merchant acquiring, e-commerce, and convincing investors that Clover will be a major competitor in small-business payments.

Dolev also viewed Fiserv’s results positively, writing that results in merchant acquiring could “boost morale” on the stock, and that the trends bode well for rival payment processors, such as Fidelity National Information Services (FIS), Global Payments (GPN), and Square.

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