MasterCard Looks to Get Out of Its Earnings Doldrums

Image source: MasterCard.

Being No. 2 isn't always the best position for a company, but credit card giant MasterCard (MA -0.07%) has used its second position effectively as a driver for stellar growth. In searching for opportunities to best rival Visa (V 0.33%), MasterCard has reached out across the globe to develop an international presence that's the envy of the financial industry.

Lately, that strategy has exposed MasterCard to some growth challenges, especially as once-strong emerging markets have taken steps back in their long-term expansions.

Coming into Thursday's third-quarter financial report, MasterCard investors are expecting only minimal increases in earnings and revenue, yet the stock continues to soar to all-time highs. Let's look more closely at MasterCard and what the card company will probably say in its coming results.

Stats on MasterCard

Source: Yahoo! Finance.

What's next for MasterCard earnings?
Investors have continued to moderate their expectations for MasterCard earnings in recent months, cutting about 3% from their third-quarter projections and reducing their full-year 2015 and 2016 estimates by 2% to 3%. The stock hasn't been fazed at all by this investor pessimism, though, climbing another 3% since late July and approaching new record highs.

MasterCard's second-quarter earnings report gave investors a number of reasons to expect future headwinds in its financials, with the strong U.S. dollar providing the biggest obstacle to growth right now. Revenue for the quarter rose less than 1% from year-earlier levels, and adjusted earnings rose just 6%. Yet when you take out the impact of adverse foreign-currency movements, MasterCard's currency-neutral sales jumped 7%, and double-digit percentage increases in gross volume, processed transactions, and purchase volumes on a constant dollar basis showed the fundamental strength in MasterCard's core business.

MasterCard's efforts to create lucrative partnerships have been one key to its ongoing success even in the face of currency-related headwinds. In June, it signed a deal with U.K. retail banking company Virgin Money to add debit card management to the two companies' existing credit card relationship, and in July, the card network company partnered with TD Bank to process debit and prepaid card transactions on MasterCard's Maestro network. In addition, MasterCard hasn't hesitated to make strategic acquisitions of companies that have useful technology that it can use to build up its competitive advantages further.

Yet both MasterCard and Visa are still trying to navigate the shifting waters of mobile-based payments. To a large extent, Visa and MasterCard have successfully guided the mobile discussion within their realm of expertise, with major technology companies choosing to work with the card giants rather than trying to recreate a similar financial infrastructure on their own.

Major merchants are still looking at coming up with their own mobile payment systems that could circumvent MasterCard's and Visa's networks and potentially keep more profits for themselves, but development has been difficult, and delays have threatened to leave alternatives too far behind to make a big market splash when they become available. If merchants' difficulties continue, then MasterCard and Visa will have scored a major strategic victory that could help them preserve and build on their respective franchises for years to come.

In the MasterCard earnings report, investors should look to see what the company has to say about global macroeconomic trends and expectations for the future. The hope that most investors have is that once the U.S. dollar stops appreciating in value so much against major foreign currencies, international results will stop looking so weak, and MasterCard's overall revenue and earnings will start to increase more dramatically.

For now, though, investors should take the foreign-exchange hits in stride and rest assured that as long as MasterCard can maintain its fundamental growth, the financial results should follow in time.