MasterCard Gets a Rude Jolt

Shares plunged Friday aftet the credit-card outfit warned of margin pressure

After MasterCard (MA on Feb. 9 announced a profit and rising numbers of transactions during the three months ended Dec. 31, the Purchase (N.Y.) company's stock price hit a new 52-week high. But it soon plummeted more than 11% as investors worried about the credit card company's ability to keep profits growing in 2007.

MasterCard's bank customers, which issue MasterCard credit cards, are consolidating into larger entities -- and with more bargaining power, they're able to negotiate lower rates from MasterCard(see BusinessWeek, 12/5/05, "When The Bill Comes Due").

The company has taken steps to change some of its pricing in recent months, such as a restructuring of cross-border transactions implemented in April 2006. This year MasterCard has "no significant pricing increase plan," CFO Chris McWilton said in a conference call. As a result, the company could see "some pressure on margin" this year, he said, according to a report from Dow Jones Newswires.

The stock-price drop overshadowed some positive news for the company. It reported net income of $41 million during the quarter, including the impact of litigation settlements, compared to a loss of $53 million during the same period of 2005. "The pace at which we are driving commerce in markets around the world gains momentum," CEO Robert W. Selander said in a press release Feb. 9.

During the quarter, the company processed $532 billion on credit, charge and debit card transactions worldwide, nearly 14% more than the same period of 2005. Customers took 817 million new cards during the quarter - more than 12% year over year.

CEO Selander is reaping the benefits of investments in promotions like the "Priceless" marketing campaign. The company had spent heavily on advertising and marketing earlier this year to support the 2006 World Cup soccer event. Such expenses declined by 8.5% during the fourth quarter compared to the year ago period. But at the same time, as people move away from paper money to the convenience of electronic payments and plastic, MasterCard's sales are rising and its revenues rose 17.2% year over year to $839 million during the fourth quarter.

It's not all rosy. Mastercard faces hundreds of millions in legal fees, as it battles consumers, regulators, and merchants worldwide over issues ranging from data security breaches to processing fees. The company only had to pay $1.7 million in litigation settlements during the fourth quarter, compared to nearly $27 million during the same period of 2005. That doesn't mean the litigation hangover is over. "Litigation expenses are lumpy and unpredictable," Morningstar analyst Ryan Batchelor said.

The company's share price surged to a new high of the year of $118.07 per share on Feb. 9, but plummeted back down by more than 11% in early afternoon trading to $102.06 per share on the New York Stock Exchange. MasterCard's stock price has rocketed from around $40 per share in May 2006, when the company went public.

"Having invested significantly in our global brand and payments network over the past 40 years, we enter our fifth decade with a leveragable infrastructure that will allow us to provide cutting-edge payment solutions for our financial institution customers as well as merchants, consumers, corporations and governments who are increasingly turning to the convenience and security of electronic payments," Selander said in the press release. "We expect this will enable us to continue to drive value for our shareholders."

MasterCard is planning to pay out a cash dividend of 15 cents per share, 66.7% more than the prior level, on May 10.

Mara Der Hovanesian in New York contributed to this report

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