MasterCard Laughs Off Swipe Fee Ruling With Impressive Earnings Report

by Alyssa Oursler | August 1, 2013 11:54 am

MasterCard Laughs Off Swipe Fee Ruling With Impressive Earnings Report

Whenever someone tells you they have “good news” and “bad news,” always ask for the bad news first.¬†At least that’s the lesson card credit card giants Mastercard (MA[1]) and Visa (V[2]) lately.

Mastercard, for one, had a sleepy start to the week. Things got interesting yesterday, though, when some bad news broke.

The news: A judge struck down the Fed’s current cap on debit card swipe fees[3]. The fees — which remained unregulated until 2011 — were set at an average of 24 cents (21 cents for each debit-card transaction, plus an additional 0.05 percent of the purchase price to cover the cost of fraud protection), but that number was ruled too high.

As you can see by the chart below, investors were quick to run from the electronics payment processor as a result. Immediate logic paints electronics payment processors and banks — from giants like JPMorgan (JPM[4]) to smaller names like Regions Financial (RF[5]) — as the big losers of the ruling, while retailers — who can either lower prices[6], as Home Depot (HD[7]) did, or capture the extra revenue — are rejoicing[8].

Luckily for Mastercard, it didn’t take long for some good new to ease the hurt. Not only did investors lose their bearish sentiment by the end of the yesterday, but they turned to bulls this morning thanks to some hot earnings numbers.

ycharts chart 25 MasterCard Laughs Off Swipe Fee Ruling With Impressive Earnings Report

In the most recent quarter, Mastercard’s profits improved by 19% year-over-year[9] — enough to beat analyst EPS expectations by an eye-popping 65 cents — on an equally impressive 15% rise in revenue. One big factor was that, quite simply, more people used its cards to make payments.

On the one hand, it’s interesting that forward-looking bad news was so quickly discarded for backwards-looking good news. But on the other, an increase in scale and impressive emerging market growth might also have put the ruling into perspective.

While the swipe fee ruling could easily cut into the margins of the company’s revenue, that’s only the case for domestic, debit card transactions. It will have no effect on markets like Latin America, which enjoyed 17% growth in transaction dollar value, or the Middle East, Africa and Asia, which enjoyed a combined 21% improvement.

Of course, timing is everything. Rival Visa (V[2]) jumped on an earnings beat last week[10], also thanks in part to strong international growth. Unfortunately, the same short-term memory that propelled Mastercard’s turnaround had the opposite effect on Visa.

The sell-off began yesterday with an 8% slide and is continuing today with no earnings to serve as a distraction. Visa, so far this week, has lost 10% of its value.

ycharts chart 26 MasterCard Laughs Off Swipe Fee Ruling With Impressive Earnings Report

The full impact of the swipe-fee ruling remains to be seen, but so far it seems like investors will care only until some bigger news come their way.

As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.

Endnotes:
  1. MA: http://studio-5.financialcontent.com/investplace/quote?Symbol=MA
  2. V: http://studio-5.financialcontent.com/investplace/quote?Symbol=V
  3. current cap on debit card swipe fees: http://www.usatoday.com/story/money/business/2013/07/31/judge-strikes-cap-debit-swipe-fees/2603299/
  4. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  5. RF: http://studio-5.financialcontent.com/investplace/quote?Symbol=RF
  6. lower prices: http://investorplace.com/2012/06/home-depot-cuts-3000-product-prices-because/
  7. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  8. are rejoicing: http://www.forbes.com/sites/halahtouryalai/2013/07/31/big-win-for-retailers-over-banks-in-new-debit-swipe-fee-ruling/
  9. improved by 19% year-over-year: http://www.usatoday.com/story/money/business/2013/07/31/mastercard-2q-earnings/2602547/
  10. jumped on an earnings beat last week: http://www.cnbc.com/id/100907595

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