Payment processor Mastercard (click ticker for report: MA) reported a strong second quarter Wednesday. The firm earned $5.65 per share, up nearly 17% from the same period a year ago (and $0.07 higher than the Street expected). Revenue grew just 9% to $1.8 billion, though that was negatively impacted by currency, causing the number to fall about $90 million short of consensus expectations. Operating margins grew 130 basis points to 54.6%, but that figure still lags Visa’s (click ticker for report: V). We think Mastercard’s shares are fairly valued at current levels.
Payment growth volume roughly tracked revenue growth, with total payment dollars increasing 9.4% year-over-year, to $890 billion. Even more telling, payment transactions increased 29% to 8.5 billion, as users are becoming more and more comfortable with paying for everything with plastic. The movement towards a “cash-less” society continues, and innovations such as Square will only increase point-of-sale acceptance. As a result of the class action merchant lawsuit against the payment network duopoly, Mastercard had to take a $13 million after-tax charge in the second quarter.
Much like competitor Visa, we love Mastercard’s cash rich business model and powerful network effect. The firm has generated over $1 billion in operating cash flow year-to-date. Thus, it was no surprise that the firm was able to repurchase $671 million in stock during the second quarter, and still has $1.4 billion available to repurchase shares under its current authorization.
However, we prefer Visa to Mastercard, though investors often see the two as interchangeable. Visa has a more powerful brand name, in our view, better operating margins and a favorable valuation. Of course, if Mastercard were able to bring its operating margins to parity with Visa’s, the firm would experience some tremendous earnings expansion. Regardless, Mastercard registers only a 6 on our Valuentum Buying Index (our stock-selection methodology), so we’d have to see a significant pull-back in the shares before getting excited about its return profile.