MasterCard's Priceless Quarter

The shares surged 20% Wednesday on another stellar profit report. How long can the credit-card network's stock defy gravity?

MasterCard's (MA) amazing growth story charged ahead Oct. 31.

The company's profit report blew away Wall Streets expectations, sending the stock 20% higher. Before the trading session, MasterCard's stock price had already quadrupled since its initial public offering in 2006.

Revenues hit a record $1.08 billion in the quarter, while earnings were $2.31 per share, vs. $1.42 a year ago. According to Reuters Estimates, analysts were expecting earnings of just $1.43 per share. Also helping the stock, MasterCard announced a plan to buy back $750 million of its stock.

People around the world are turning to MasterCards — along with the credits cards of its other competitors — to make purchases rather than using cash. "You've got a global secular trend of shifting from cash to plastic," says Morgan Keegan analyst Robert Dodd.

Though growth in the U.S. slowed a bit, customers in the rest of the world, especially in emerging market, are starting to use their MasterCards at a rapid rate. MasterCard processed 4.8 billion transactions last quarter, a 13.3% increase from a year before.

Investors already had become accustomed to double-digit increases in card use. MasterCard blew away expectations in other ways. It raised fees to its bank customers and cut back on the growth of its expenses. Also, cross-border purchases — especially European tourists taking advantage of the cheaper U.S. dollar — enabled MasterCard to collect more in fees.

It's important to note that MasterCard isn't really a credit card company: It doesn't actually issue cards or mail out bills, so it doesn't matter all that much to MasterCard whether customers pay their credit card bills on time. Banks, MasterCard's customers, actually take on that job, while MasterCard, like Visa, runs the electronic network that enables credit card purchases by connecting merchants and banks. It makes money on each transaction made using its network.

How much longer can MasterCard keep up its rapid growth? Are expectations being pushed too high?

On the plus side, "it appears there is a lot of momentum and wind at their back," says Sanjay Sakhrani, analyst at Keefe, Bruyette & Woods (KBW). MasterCard should be able to keep costs down going forward, he says. The rapid growth in card use around the world may slow a bit — perhaps from "extremely strong" to "very strong" growth — but, he says, "That aspect of the story probably doesn't go away." (KBW seeks investment banking business from MasterCard.)

Dodd admits that MasterCard can't keep up its rapid earnings growth forever. And at least some of this quarter's big surprise came from one time items: Big bills that were pushed off into the fourth quarter from the third, for example, or benefits from currency movements. But Dodd is still optimistic, noting that much of MasterCard's spectacular earnings growth is coming from holding down expenses.

One big concern noted by analysts is a possible slowdown in consumer spending in the U.S. Some worry the decline in housing prices or a slower economy could cause Americans to stop pulling out their credit cards so often.

But Dodd says even this is less of a worry than many believe. If consumers are strained, they might actually use their credit cards more, he says, because they don't have as much cash available in their bank accounts.

The best measure of MasterCard's success may be its biggest rival's attempt at imitation. MasterCard's record as a public company has its primary competitor Visa seeking similar riches on Wall Street. Formerly owned by its banking customers, Visa has reorganized and is expected to go public in early 2008.

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