Will MasterCard Earnings Bounce Back This Quarter?

Image source: MasterCard.

Credit card giant MasterCard (MA -1.19%) has been a public company for only about a decade, but already it has posted impressive performance for long-term investors. The pace of innovation in the electronic payments industry has forced MasterCard to adapt in order to protect its competitive position, but it has also created new opportunities for growth. Coming into its second-quarter financial report on Thursday, MasterCard investors wanted to see evidence that the company would stop seeing declines on its bottom line and instead return to its long-term trajectory to become an even more important force in the global payments industry. Let's take an early look at MasterCard to see whether it will emerge from its doldrums and move forward more strongly than ever.

Stats on MasterCard

Data source: Yahoo! Finance.

Can MasterCard earnings put in a solid rebound?

In recent months, investors have grown guardedly optimistic about MasterCard earnings, raising their projections for the second quarter and for the full 2016 year by a penny per share each. However, the stock hasn't responded well, and investors have suffered a 7% loss since mid-April.

MasterCard's first-quarter earnings report alerted investors to some of the pressures that the company has faced recently. Even though MasterCard's revenue rose at a 10% pace, which was faster than most shareholders had expected, net income was down from year-ago levels. The card giant blamed the downturn on currency effects and the loss of a key tax credit, but fundamentally, MasterCard continued to fire on all cylinders. Double-digit percentage growth in gross dollar volume, processed transaction counts, and worldwide purchase volumes when measured in local currency terms showed the resiliency that MasterCard has been able to muster even in the face of tough economic conditions throughout much of the globe.

During the quarter, some MasterCard investors became concerned when CEO Ajay Banga made a major sale of shares in the company, reducing his stake in the card giant by half. However, as Motley Fool analyst Jordan Wathen pointed out, Banga has followed a pattern of making options-related sales during the spring. The fact that the CEO gets a portion of his compensation from the performance of the share price makes it unlikely that the sale reflects any negative sentiment about MasterCard's future.

Does MasterCard face real challenges?

More serious is the potential for trouble resulting from the U.K. Brexit vote to leave the European Union. Shares of MasterCard reacted negatively to the referendum results, fearing that the move would stifle economic activity within the eurozone and potentially lead to a pullback in spending activity among customers in the U.K. and throughout the European continent. Those fears largely dissipated in the aftermath of the vote, and many now believe that the impact of Brexit will be minimal, making MasterCard and some of its international card network peers look more attractive as investments going forward.

Still, MasterCard will have to fight hard in order to remain competitive in the industry. Even among traditional card network giants, the battle for partnerships with major retailers and other key drivers of transaction growth has been hard-fought, and MasterCard won a key victory when it won the co-branding business from airline giant JetBlue. But to maximize the opportunity, MasterCard has to look for more high-profile partners to win over from rivals, and that will be tough because of how hard MasterCard's peers are fighting to retain existing business and steal new customers from other providers.

In the MasterCard earnings report, investors should watch to see how executives respond to the changing dynamics in the global economy and their impact on the payments industry. With so much competition not only from traditional card networks but from e-commerce-spawned specialists that are disrupting the industry, MasterCard must continue to execute well and keep winning business wherever it can.