There's Nothing Spooky About This Holding's September Quarter and Outlook
Favorable data bode well for continued consumer spending. Here’s where we’d consider adding more shares.
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Coming off Thursday's September-quarter earnings report and conference call, shares of Mastercard MA reacted positively at the market open, but soon turned lower along with the overall market. Despite a solid quarter, we are likely to see adjustments to December-quarter EPS estimates that could trigger some price target re-setting, especially for the aggressive MA targets out there.
We’re sticking with our $535 price target and our Two rating. We’ll continue to review jobs and consumer spending data and revisit our price target as needed.
Mastercard’s September Quarter
For its September quarter, Mastercard delivered EPS of $3.89, besting the $3.74 market forecast, on revenue of $7.37 billion, up 12.8% year over year and nicely ahead of the $7.27 consensus. The primary driver of revenue, payment network net revenue, rose 11% excluding the impact of currency, driven by stronger-than-expected gross dollar volume, which rose 10% to $2.5 trillion from $2.3 trillion in the year-ago quarter. That reflects the combination of market-share gains but also the overall strength and resiliency of consumer spending. Mastercard’s cross-border volumes increased 17% quarter over quarter.
Outlook for the December Quarter
In recent weeks, we’ve discussed how the continued strength in the economy and more folks working with higher wages bodes well for consumer spending. However, continue to think consumers will be selective and opt for ways to stretch their dollars where they can, hence our staying bullish on Costco COST and Amazon AMZN. During its earnings call, Mastercard’s comments support that line of thinking about the economy and consumer spending.
That thinking led Mastercard to guide net revenue growth up in the low teens in the December quarter, which meshes with the 12.9% year-over-year increase the market was expecting. The same goes for the telegraphed increase in operating expenses for the December quarter, which should be up at “the high end of a low double-digit range.”
After breaking out our decoder ring, that sounds near 13% or so, which is vague enough, in our view, to potentially bring some cushion for the company’s December-quarter bottom line. While the effective tax rate for the September quarter was 15.6%, the expected geographic mix for the current suggests that could be a tad higher near 17%.
Keeping Our MA Price Target
As Wall Street factors those comments into its thinking, we’re likely to see a few pennies lopped off the current consensus December-quarter EPS estimate of $3.69. But even if we see that figure fall by $0.10-$0.15 per share, Mastercard should continue to deliver year-over-year double-digit EPS growth.
As those adjustments are made, we’ll more than likely see some of the sky-high price targets for MA shares above $575 come down. Because of our more conservative price target at $535, we won’t have to make any changes to our target or our Two rating.
Where We May Consider Adding
As we digest Friday’s October Employment Report and move through the holiday shopping season, we’ll look to revisit our MA target on signs of stronger-than-expected spending. If market forces pull MA shares near key support levels, we’ll consider adding additional shares. While the 50-day moving average sits near $494, we see far more support between the 100-day and 200-day averages at $471 and $465, respectively.
At the time of publication, TheStreet Pro Portfolio was long MA, COST and AMZN.
