The Zacks Analyst Blog Highlights: MasterCard, Visa, Wells Fargo & Company, JPMorgan Chase and PNC Financial Services

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May 04, 2011, 09:30 ET

CHICAGO, May 4, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: MasterCard Inc. (NYSE: MA), Visa Inc. (NYSE: V), Wells Fargo & Company (NYSE: WFC), JPMorgan Chase & Co. (NYSE: JPM) and PNC Financial Services Group Inc. (NYSE: PNC).

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Here are highlights from Tuesday's Analyst Blog:

MasterCard Excels Once Again

MasterCard Inc. (NYSE: MA) first quarter operating earnings per share of $4.29 came in significantly ahead of the Zacks Consensus Estimate of $4.10 and $3.46 in the year-ago quarter. Net income for the reported quarter was $562 million, up 23.6% from $455 million in the prior-year quarter.

Results for the reported quarter improved over the prior-year quarter primarily due to better pricing, an increased number of processed transactions, strong gross dollar value (GDV) growth and a lower tax rate that also drove the operating margin. However, increase in rebates and incentives and higher operating expenses were on the downside.

Total revenue increased 14.8% year over year to $1.50 billion, also above the Zacks Consensus Estimate of $1.45 billion. Meanwhile, currency fluctuations had a neutral impact on net revenue growth. The increase was primarily due to 5% favourable pricing changes, an 11.1% growth in the number of processed transactions to 6.0 billion and an 18.5% increase in cross-border volumes.

GDV increased 12.8% to $728 billion while worldwide purchase volume climbed 12.9% year over year to $545 billion, during the reported quarter. As of March 31, 2011, MasterCard issued 1.7 billion MasterCard-and Maestro-branded cards.

Total operating expenses increased 9.4% year over year to $655 million. Currency fluctuations contributed marginally to the increase in the expenses. The overall increase was primarily attributable to a 7.9% increase in general and administrative expenses.

While advertising and marketing expenses increased 12.1%, depreciation and amortization expenses grew 20.0% from year-ago quarter. However, operating margin came in at 55.7%, up from 53.5% in the year-ago quarter.

MasterCard's effective tax rate for the reported quarter was 32.8%, modestly lower than 34.6% in the year-ago period, primarily attributable to a favorable geographic mix of earnings.

As of March 31, 2011, MasterCard's net operating cash flow was $355 million, up from $95 million as of March 31, 2010. At the end of reported quarter, cash and cash equivalents decreased to $2.95 billion from $3.07 billion at the end of 2010 while long term-debt was nil.

Meanwhile, retained earnings increased to $3.46 billion from $2.92 billion at the end of 2010. Total equity grew to $5.20 billion from $5.22 billion as of December 31, 2010.

Our Take

MasterCard's prime peer, Visa Inc. (NYSE: V), is expected to report its fiscal second quarter earnings results after the market closes on May 5, 2011.

MasterCard benefits from strong secular demand growth, meaningful international exposure, diversified product portfolio, high barriers, excellent pricing power, risk-free balance sheet and impressive operating leverage. Also, the above-average earnings growth, strong competitive position and leverage to an eventual economic recovery will result in a relative valuation premium.

However, we are concerned about MasterCard's resilience and ability to raise prices, the detrimental effects of the Consumer Protection Act in the U.S. and scope for increasing cash flow. Hence, the cautious outlook over the near term justifies our Neutral recommendation.

Earnings Scorecard: Wells Fargo

Wells Fargo & Company (NYSE: WFC) reported first quarter 2011 earnings of 67 cents per share on April 20 that was in line with the Zacks Consensus Estimate. Quarterly results reflect a decent reserve release and a decrease in expenses, offset by revenue downturns.

The market had sufficient time to absorb the earnings news following its release. The majority of analysts covering Wells Fargo have made downward revisions. The top line remains a matter of concern at the company.

Agreement of Estimate Revisions

A company reporting earnings in line with expectations is not discouraging but failed to create enough excitement among the analysts due to the lower-than-expected revenue figure.

Of the 26 analysts covering the stock, 11 have lowered their estimates for the upcoming quarter while only 3 have moved in the opposite direction. For full-year 2011, 11 analysts have revised their estimates in the southward direction while only five have moved north. Additionally for full-year 2012, 15 analysts have reduced their estimates while only 3 moved up. Clearly, the analysts predict dull full year 2011 and 2012.

The primary reason for this downward revision in EPS estimates seems to be concerns over Wells Fargo's top line. While the Wachovia acquisition and the demise of some smaller players helped it garner a larger share in the mortgage markets, economic headwinds are responsible for the revenue slump. Lower assumptions for loan growth and restricted scope for margin expansion in the current environment remains a challenge for Wells Fargo.

Magnitude of Estimate Revisions

Looking at the magnitude of estimate revisions we find that the full-year 2011 estimate has moved down by 7 cents to $2.79 per share. For full-year 2012, the estimate moved southward by 12 cents to $3.48 per share in the last 30 days.

Holding Wells Fargo Still Worthwhile

It becomes quite evident from the estimate revision trend that Wells Fargo's outlook looks subdued in the current economic environment. Yet, its diverse geographic and business mix positions it relatively well.

Wells Fargo's Wachovia merger integration remained on track and in March. The company also announced a special first quarter 2011 cash dividend of 7 cents per share on its common stock. Combined with a quarterly dividend of 5 cents per share declared in January 2011, the special dividend brought the total dividend to 12 cents. The increased dividend was paid on March 31 to shareholders of record on March 28.

The board also augmented Wells Fargo's share repurchase by an additional 200 million. The quarterly dividend rate increase to 12 cents per share was part of the capital plan the company submitted to the Federal Reserve Board in January 2011.

The other Wall Street biggies who have similarly submitted capital plans to the board and got approval from the Fed for dividend raise and share buyback include JPMorgan Chase & Co. (NYSE: JPM) and PNC Financial Services Group Inc. (NYSE: PNC). These banks needed to show that they will have adequate capital to address potential losses over the next two years, even under adverse scenarios.

While the regulatory issues remain a concern for Wells Fargo, we believe that leverage from expense control initiatives, lower integrations expenses and balance sheet strength would help the company navigate the current challenging environment. Additionally, with improving economic conditions, a promising credit quality outlook and a strong business model, Wells Fargo has strong potential for earnings growth. The capital deployment initiatives further inspire investors' confidence in the stock.

Wells Fargo shares retain a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.

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