Billboard reported Thursday that MasterCard Inc. (NYSE: MA) has launched a new campaign titled "Roots of Rock" that offers free downloads for cardholders from Universal Music Group. Apparently the free aspect of the campaign is limited and after 100,000 songs have been downloaded, MasterCard will begin to charge $0.80 per track. Even after the credit card company begins charging for downloads, pricing for tracks is still lower than Amazon.com Inc. (NASDAQ: AMZN)'s MP3 Store ($0.89) or Apple Inc. (NASDAQ: AAPL)'s iTunes Store ($0.99).
Cardholders who also make a purchase by August 31 will be "entered into a sweepstakes with a grand prize of having a meet and greet with Jon Bon Jovi, Eric Clapton or Kenny Chesney." MasterCard executive Amy Fuller told Billboard with the new campaign, the company has "created unparalleled music experiences with three of the world's most popular artists, providing consumers with an intimate perspective on these icons that few fans will ever have." But those fans will have to win the sweepstakes.
MasterCard's campaign to offer free downloads is like numerous other programs that are linked with music companies, but it offers to take the digital market to a larger consumer base. Lowered prices (eventually) for the campaign mean that Universal Music Group will continue to hold on to the lead in music sales, if only because the music company is the only one on board with MasterCard. Consumers that might not have ever downloaded a track may be enticed to try out the campaign and the sweepstakes. This type of growth is what the music industry will need if digital sales are ever going to replace physical sales successfully and completely.
Mastercard (NYSE: MA) shares are trading higher today after the company announced it will pay competitor American Express (NYSE: AXP) up to $1.8 billion to settle an antitrust lawsuit. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on MA.
After hitting a one-year low of $120.00 in August, the stock hit a one-year high of $320.30 in May. MA opened this morning at $291.10. So far today the stock has hit a low of $290.10 and a high of $295.16. As of 12:40, MA is trading at $294.10, up $13.17 (4.9%). The chart for MA looks bullish but deteriorating, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider an October bull-put credit spread below the $195 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in four months as long as MA is above $195 at October expiration. Mastercard would have to fall by more than 33% before we would start to lose money. Learn more about this type of trade here.
MasterCard (NYSE: MA) is recently trading at $290 in pre-open trading, above its close of $280.37.
American Express (NYSE: AXP) reached a $1.8 billion settlement with MA over the card issuer's lawsuit with the payment processor over allegations MA and some other banks prohibited financial firms from issuing credit cards through AXP.
MA July option implied volatility of 42 is near its 26-week average according to Track Data, indicating non-directional price movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Serving 25,000 members worldwide in more than 210 countries, Mastercard Inc. (NYSE: MA) is the second largest payment system, behind Visa (NYSE: V), issuing credit and debit brand cards which provide access to its transactions network. For a fee, of course.
And revenue from those fees and other charges is advancing at a solid pace. In general, analysts expect F2008 revenue to increase a solid 20-25%. Further, while U.S. gross dollar volume increases will slow with the slow-growth U.S. economy in 2008, international GDV growth should remain robust.
In addition, Mastercard has multiple opportunities to increase market share, both domestically and internationally, as acceptance of credit card use for non-traditional purchases grows. Analysts are also impressed by debit card and prepaid card program progress. The Reuters F2008/F2009 EPS consensus estimates for MA are $8.647/$10.86.
The risks? Mastercard remains vulnerable to a protracted U.S. economic slowdown, and analysts also are also keeping an eye on the rise of new competitors into the transaction space, primarily PayPal.
The First Call mean rating for MA is: Buy. [21 firms.] Mean 2008 target: $333. [high: $390, low: $245.]
Stock Analysis: Mastercard is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than 2 years should be rewarded from MA's shares. Note: More-cautious investors may wish to wait until MA pulls-back to $270-280, but keep in mind Mastercard may not retreat to that level. Sell / Stop Loss if you were to purchase shares in this company: $215.
Disclosure: Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.
I love the long-term prospects of Visa (NYSE: V) and MasterCard (NYSE: MA), but I do have to concede that a pesky lawsuit by Discover (NYSE: DFS) is the one big fly in this story's soup. According to the following article, Discover wants both credit-card companies to pay $6 billion for perceived violations of antitrust regulations. Unfortunately, these damages could be tripled if Visa and MasterCard lose. One of the big problems here is that American Express (NYSE: AXP) already won a settlement of $2.1 billion from Visa late last year and the company established an escrow fund worth $3 billion for litigation payments.
I'll admit, this lawsuit does give me and my credit-card investment thesis a little case of the shivers. After all, tripling $6 billion to $18 billion means that a huge amount of money is in play here, and a successful outcome for Discover would hamper the stocks of the two big card entities. When you read through the litigation risks in Visa's SEC filings (out of MasterCard and Visa, the latter is my favorite since it is still relatively fresh off its IPO and MasterCard has already had a big run), they are pretty scary. And the fact that the $6 billion figure just came to light this week has probably soured the perception of some investors and analysts. Nevertheless, all the previous litigation talk didn't stop Visa's stock from taking off after its IPO earlier this year.
There is a great article on Visa (NYSE: V) and MasterCard (NYSE: MA) over at TheStreet.com. It talks about the incredible growth in prepaid cards. A prepaid card is one which has a certain quantity of stored value on it. Think of it as being similar to a gift card, except that a prepaid card can be used most anywhere. Both Visa and MasterCard want to capture as much market share for prepaid cards as possible because they offer the same revenue model as existing credit cards in terms of processing fees.
The wonderful thing about stored-value cards is that they represent the ultimate desire of the business economy: conversion into a cashless society. Not only does business want this, but so does the government, which will probably increase its use over time in terms of distributing monies such as unemployment benefits and social-security funds to individuals lacking bank accounts.
An important point made in the piece is the fact that prepaid cards will take a long time to reach critical mass and to become economically significant for Visa and MasterCard's bottom lines. This must be kept in mind, yet I have to say that I personally think prepaid cards could become more significant sooner than people think, assuming that the two big guns in this area buckle down and make some smart moves. Let me describe what I mean.
You know, I can't take much more of the financial crisis. That's because I own Newcastle Investment (NYSE: NCT) and CapitalSource (NYSE: CSE). I'm kind of hoping we get out of the mess brought on by the housing-bubble pop and the mark-to-market devaluation so that these stocks will rise again. As we continue through this recession, another problem may soon assert itself.
According to this article, consumers are starting to rely on their credit cards a little too much. This could lead to a larger quantity of delinquencies. In fact, the piece states that card delinquencies were at 4.86% in Q1, a multi-year high. Further, revolving debt increased 7.9% in March, coming in at $957 billion. Not too far away from a trillion, my friends. Let me tell you, this is the last thing we need right now. Delinquencies will become a major problem for the banks, leading to further erosion of confidence on financials by investors.
As can be expected, two ideas immediately came up during the course of the article: Visa (NYSE: V) and MasterCard (NYSE: MA). How could they not? If people are taking credit debt, then they must be using those two brand names. Since Visa and MasterCard don't really have exposure to the debt side of things, they are relatively safe from that aspect.
Today's stock market rally may be more of a relief run than anything, but the end of day strength of late has been hard to ignore. Today we saw a huge drop of almost 9 million barrels of oil that caught traders off guard, but interestingly enough the oil markets dropped considerably. Combine that with a slightly higher revision to Q1 US GDP to +0.9% and all of a sudden the recession isn't looking so serious. These are the major US index closing levels:
I recently attended the Warrillow Conference, which focuses on how to sell to the small business market. And, yes, it's a big opportunity -- with more than 27 million small businesses in the U.S. Some of the big players in the space include MasterCard (NYSE: MA), FedEx (NYSE: FDX), Intuit (NASDAQ: INTU) and so on.
Well, one of the panels at Warrillow had a group of small business owners -- and they talked about what works when trying to sell to them.
Let's take a look:
Wearing many hats: The small business owner does just about everything. In other words, time is a precious commodity. So, when pitching, make sure things are clear and concise. What are the main benefits? The costs?
More importantly, small business owners want something that is plug-and-play and doesn't require a big learning curve.
The assistant: Many small business owners have one. And, an assistant is often a gatekeeper.
In other words, it's actually a good idea to make your pitch to the assistant -- since he or she will likely relay the information to the owner.
Credit cards ... the little plastic cards in your wallet that are so convenient to rely on when you are strapped for cash. While the convenience of having cards definitely makes it easier to buy items when you are running low on cash, the flip side is that credit card debt can drown the typical household, and statistics are showing that Americans are pulling out their cards more than before.
One of the reasons why credit card usage has been on the rise is the fact that homeowners are having a harder time using home equity to get a cash infusion into their accounts. As a result, they are looking to borrow money from somewhere, and more times than not, they are turning to credit cards.
The evil with credit cards is that once you start to use them to pay for your basic necessities like food and gas, you find that in the months to come you still can't afford your basic needs but in addition, your monthly bills are racking up like crazy due to your credit card expenses. It's a scary cycle that many families find themselves trapped in.
After the world's largest credit and debit card processor, Visa Inc. (NYSE: V), reported earnings last night, today was its main competitor MasterCard Inc.'s (NYSE: MA) turn to step up to the plate. The company posted quarterly earnings figures that topped analysts' expectations, pushing its shares up 10% in morning trading.
MasterCard reported that its first quarter profit more than doubled to $446.9 million, or $3.38 a share, helped by gains from the sale of its investment in Redecard S.A. in Brazil. The weak dollar and more customers who used their credit and debit cards for purchases also boosted the company's earnings.
Included in MasterCard's earnings was 37 cents a share related to the terminating of a customer business agreement. Excluding that, the credit-card giant posted earnings of $3.01 a share, exceeding analysts' estimates for a profit of $2.00 a share.
Visa Inc. (NYSE: V) reported earnings for the very first time since its IPO last month -- and I'll bet there are a lot of you out there who are, like myself at the moment, kicking yourself for not buying the card-entity's stock!
As for the Q2 numbers, Visa saw its revenues decline by 50% to about $1.5 billion. Net income on an adjusted basis was $0.52 per share for the Class A common stock. Looking at the cash-flow statement, we see that cash from operating activities for the six-month period was used instead of generated, to the tune of $252 million -- last year's operational cash flow was much better at a positive $386 million. There was a big hit on the cash-flow statement from litigation effects.
Here's my reaction to the earnings -- from a pure individual-investor viewpoint, I personally don't think the stats are so important from this first report. Visa has just begun its life as a stock; it has incredible brand equity, and if you look at how MasterCard Incorporated (NYSE: MA) shareholders have benefited from that company's float, I'd be surprised if something similar doesn't happen with this one over the next couple years. I meant to buy Visa on its first day of trading, but I didn't; how wrong I was. The shares closed today at $75.63, but are trading down 4% as of this writing in the post-hours. Management gave some guidance in the press release -- revenues should grow the next few years somewhere between 11% and 15%, earnings per share should see solid 20% appreciation, and annual free cash flow will be at least $1 billion (this assumes that litigation reimbursements from litigation escrow are added back). I like the guidance, I like the strength of the stock, I like that people use Visa cards like crazy -- I want to watch, maybe even pray, for pullbacks on this stock.
Disclosure: I don't own shares in any of the companies mentioned here; positions can change at any time.
Next week is sure to be filled with fun and volatile market conditions. The highlight will be the Fed decision on key rates, due on Wednesday, April 30, following a two-day meeting. Anytime the Fed has the floor, the markets listen. Tuesday and Wednesday will be filled with speculation up until the time of the announcement of a cut or pause.
There are many possible outcomes for this meeting, as we have seen a substantial change in investor sentiment regarding the potential need for further rate cuts. The buzz on the street is for a cut of 25 basis points and then a wait-and-see attitude from there. I think that is the most likely direction.
There has been a great deal of concern that all the recent rate cuts have not provided the benefit to consumers the economy needs. Clearly, there is a fatty clog within our financial circulatory system. Traditionally, the Fed likes to see how its actions trickle into the economy before it continues too far down one path, which would argue for a pause now. Plus, the Fed does not want to run out of ammunition by cutting rates too far too fast. But there is no question that we are dealing with a more aggressive Fed than we have seen in decades, so I think we will see another small rate cut.
After hitting a one-year high of $69.00 shortly after its IPO last month, the stock has been sticking at a level between there and $65. This morning, V opened at $68.44. So far today the stock has hit a low of $66.01 and a high of $68.72. As of 12:00, V is trading at $66.42, down $1.67 (-2.4%). The chart for V looks bullish and steady.
For a bearish hedged play on this stock, I would consider a May bear-call credit spread above the $80 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in 6 weeks as long as V is below $80 at May expiration. Visa would have to rise by more than 20% before we would start to lose money. Learn more about this type of trade here.
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Visa Inc.
Next week is sure to be filled with fun and volatile market conditions. The highlight will be the Fed decision on key rates, due on Wednesday, April 30, following a two-day meeting. Anytime the Fed has the floor, the markets listen. Tuesday and Wednesday will be filled with speculation up until the time of the announcement of a cut or pause.
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