Earnings Preview: Charge to blemish MasterCard 3Q

NEW YORK - MasterCard Inc. reports earnings for the fiscal third quarter on Monday. The following is a summary of key developments and analyst opinion related to the period.

OVERVIEW: MasterCard's third quarter is likely to be marred once again by charges related to an antitrust settlement. Investors will also be looking for any signs of weakening transaction volume, and other effects of a worsening economy.

MasterCard and rival Visa Inc. agreed earlier this week to pay Discover Financial Services LLC up to $2.75 billion to settle an antitrust suit. The settlement resolves a 2004 lawsuit filed by Discover against MasterCard and Visa, claiming they had harmed its business by preventing their member banks from issuing credit cards for Discover's network.

MasterCard expects to record a charge of $515.5 million in the third quarter related to its portion of the settlement agreement of $862.5 million. Morgan Stanley, Discover's former parent, has agreed to pay MasterCard $35 million, resulting in a total settlement of $827.5 million for MasterCard.

Purchase, N.Y.-based MasterCard posted a second-quarter loss because of a $1 billion charge related to a similar settlement with American Express Co. Excluding the charge, the payment processor's second-quarter profit rose 9 percent, while sales jumped 25 percent on increased spending by cardholders, especially with debit cards.

While both MasterCard and Visa are sheltered from deteriorating trends in consumer credit because they do not lend, analysts expect transaction volume to decline significantly in coming quarters as consumers cut back on spending.

MasterCard and Visa make money by processing transactions made on their branded cards issued by member banks such as Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc.

Visa said earlier this week that credit card use has already declined, slowing to low-single digit growth during September, and actually turning negative for the first three weeks of October, meaning people stopped charging as the economic crisis hit. However, debit payment volume has continued to grow, and service, data processing and international transaction fees all rose.

Still, Visa pared back its growth forecast due to the slowing economy.

BY THE NUMBERS: Analysts polled by Thomson Reuters, on average, are expecting earnings of $2.25 per share on revenue of $1.27 billion.

ANALYST TAKE: Calyon Securities analyst Craig Maurer expects MasterCard to report earnings of $2.33 per share, with year-over-year revenue growth of about 20 percent to $1.3 billion, driven in part by an increase in fees. Maurer expects both revenue and gross dollar volume to benefit from foreign exchange rates during the quarter.

WHAT'S AHEAD: Analysts expect volume levels to be under pressure well into next year, but believe aggressive expense control should help the company maintain earnings growth.

"Although transaction, purchase volume and organic revenue growth are all poised to decelerate measurably over the next several quarters, we argue that analysts' models and investors' expectations have adjusted to this reality," wrote SunTrust Robinson Humphrey analyst Andrew Jeffrey in a recent note to clients. "Further, earnings-per-share growth should remain well ahead of organic revenue expansion, owing to aggressive expense control and operating leverage."

Jeffrey raised his 2009 profit estimate to $10.64 per share from $10.22 per share.

Calyon's Maurer, on the other hand, recently lowered his profit estimate to $10.63 per share from $11.80 per share.

"Looking out to 2009, it's now clear that global economic pressure on volume growth will be significant, and that the currency tailwind from 2008 will morph into a meaningful headwind in 2009," Maurer said.

STOCK PERFORMANCE: MasterCard shares fell 33 percent to close the quarter at $177.33. Shares are down 35 percent for the year.

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