AmEx Warning Means Trouble for Mastercard

by: Notable Calls January 11, 2008 | about stocks: MA    
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Deutsche Bank is lowering their Mastercard (NYSE:MA) target to $200 from $250 following warning from American Express (NYSE:AXP). Firm says they are keeping their Buy rating on the stock, as they believe the stock is still a safe haven for long-term oriented investors given tremendous pricing power, massive discretionary cost controls that should enable MA to achieve firm's Street-high EPS, and a strong balance sheet that MA should use to aggressively buy back stock.

Yet, even these considerations may not be enough to overcome what could likely be near-term multiple compression in the wake of American Express' warning, coupled with increasingly negative sentiment in the broader market. The higher uncertainty within this turbulent market means that investors will be unlikely to pay the same premium they paid just a few months ago. Firm's revised twelve-month price target (20x our 2009 estimate) acknowledges that further multiple compression is possible. Other risks include negative court rulings, regulatory decrees, SEPA delays, and weaker travel trends.

Notablecalls: Well, what does this really mean? It should read something like: "Dear customers, as you are well aware, we have been touting MA as a Buy for quite some time and maybe the loudest when the stock was near its current $220 peak. We do hope you have made money on the long side but would now suggest you take some off the table as we think things will get somewhat ugly. We cannot back off our Buy rating just yet (due our Street high estimates) but we are kind enough to let you know what we really think!"

Thanks for the honesty, Chris. Appreciate it.

I think MA will be 15-20 points lower over the coming weeks. Adjust your risk accordingly. Expect to see bounces along the way, though.

MSCO is out defending MA this AM but they too acknowledge there is very little to be said here.

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This article has 11 comments:

  •  
    Jan 11 09:16 AM
    You forgot to mention the coming Visa IPO. When Visa comes public it will be the clear leader in this industry among the publicly traded companies. Some investors will switch horses to ride the leader. This will likely hurt the MA share price.
    Reply | Link to Comment
  •  
    Jan 11 11:25 AM
    I could not disagree more with this call. This is why I like to go against analysts. The same ones downgrading financials about 4 weeks ago after missing it all in July - November 07. :)

    www.fundmymutualfund.c...
    Reply | Link to Comment
  •  
    Jan 11 04:27 PM
    MA is different from AMEX. Their revenues are from transaction fees( merchant fees), not from comsumer loans. There is no bad loans involved and it is the safest buy at the moment. These analysts are just trying to drive down the stock price so that they can buy.
    Reply | Link to Comment
  •  
    Jan 11 05:11 PM
    American Express earnings are down because of lending problems. MasterCard does not "lend", they process transactions. Why does this mean trouble for MC? It shouldn't. MC earnings could suffer if there is a general slowdown in spending, impacting their transaction growth, but there is no lending to worry about.
    Reply | Link to Comment
  •  
    Jan 11 06:37 PM
    I went short MA on 12/28/07 at $210.65. As has been stated, MA makes its money on transaction fees (I know, I pay them). Spending goes down, MA's revenue goes down, it's as simple as that. MA_holder, do you think people are going to be spending more on their credit cards in the coming months? I don't. Trader Mark, I love you, but this isn't one of your winners.
    Reply | Link to Comment
  •  
    Jan 11 11:30 PM
    As a matter of fact I think people will keep using credit cards, especially in difficult times. This will result in bad loans to issuing banks but has little effect on MC. Actually it might benefit MC in some ways.

    Typical merchant fees are 1.5% + 25c(per transction). $100 single transaction merchant fee is $0.25 + $1.5 = $1.75

    If this transaction is split into $10x10, merchant fee will be $0.25x10 + $1.5 = $4.00, which is equal to $250 single-transaction merchant fee.

    In difficult times people will keep making smaller purchases, although total spending may not be as much, total merchant fees may actually increase, or stay on par. And don't forget overseas growth and a weak USD, both will benefit MC.

    Reply | Link to Comment
  •  
    Jan 12 01:24 AM
    I agree on overseas and the dollar to some extent, if the rest of the world avoids catching our recessionary bug (which I doubt), and keeping in mind that recession tends to strengthen the dollar (reduces trade deficit). But I think credit card use is going to decline in the US as people cut back on spending in general. Also, credit cards are a really awful financial instrument (the heroin of finance) if you pay interest (i.e., don't pay in full each month). People are going to max out and either cut back voluntarily or go into bankruptcy. The $100 --> 10 x $10 is not realistic. More likely it will turn into 2 x $25. As a merchant with a discretionary product, I'm seeing just fewer customers buying.
    Reply | Link to Comment
  •  
    Jan 12 11:29 AM
    I think that AmEx is reflecting a meaningful economic contraction.

    Investors are comparing the current situation with the "Mid-Cycle"
    slowdown of 1995.

    Real Retail Sales have trended lower and looks weaker than in 1995.
    Reply | Link to Comment
  •  
    Jan 12 12:58 PM
    Will-

    Good chart. If you could plot (decreasing) real income against those sales, the difference would be increasing debt, which explains much of our current situation and how we got here. A cutback in consumer spending is inevitable. For an economy based on ever-increasing consumption, that's dangerous.
    Reply | Link to Comment
  •  
    Jan 12 06:56 PM
    what about the fact that most of the high fliers of 2007 are correcting and this one is probably no different. Part of MC prosperity is *somewhat* linked to consumer spending/transactions and this is definately spooky.
    Reply | Link to Comment
  •  
    Jan 12 11:14 PM
    kunst
    Great Idea, I will work on it.
    Reply | Link to Comment
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