MasterCard, Visa soar though card spending trimmed

By Jonathan Stempel

NEW YORK (Reuters) - MasterCard Inc (MA.N) and Visa Inc (V.N) shares soared on optimism that efforts to cut costs will offset pressure on revenue as sinking economies cause consumers and businesses to default more and spend less on credit cards.

The gains came a day after MasterCard, the second-largest card network, posted third-quarter operating profit, excluding a litigation charge, of $322 million, or $2.47 per share, above the $2.22 per share analysts expected.

Revenue rose a larger-than-expected 24 percent, and the Purchase, New York-based company said operating expenses should remain unchanged in 2009, below what some analysts expected.

San Francisco-based Visa, the largest card network, on October 29 posted results that also topped analysts' forecasts, and said annual revenue growth may be at the lower end of its prior target.

Card networks are not directly exposed to rising defaults because they do not issue cards, unlike issuers such as American Express Co (AXP.N), Bank of America Corp (BAC.N), Capital One Financial Corp (COF.N), Citigroup Inc (C.N) and JPMorgan Chase & Co (JPM.N).

But transaction and dollar volume may decline as card holder curb spending, cutting into the companies' fees from processing transactions. MasterCard said it expects revenue in 2009 to grow at a pace below its long-term target of 12 percent to 15 percent.

"The key to MasterCard's business model, we believe, is its ability to maintain strong earnings growth throughout cycles, given an ability to maintain healthy revenue growth while taking advantage of considerable expense leverage," wrote Barclays Capital analyst Bruce Harting.

"We also note," he added, "that the significant spend volume growth slowdown seen in October, weakening consumer confidence, what's likely to be a slow holiday season, and other weaker consumer spending variables to come, may limit near-term upside potential for shares."

Several analysts, including Harting, lowered their earnings forecasts, share price targets or both for MasterCard, citing the spending slowdown.

"We are in an economic crisis like I don't think we have seen in our lifetime," MasterCard Chief Financial Officer Martina Hund-Mejean said in a Monday interview.

Last week, American Express said it will cut 7,000 jobs to help save $1.8 billion in 2009. Bank of America last month reported the first quarterly loss in its credit card unit since it bought card issuer MBNA Corp for $34.6 billion in January 2006.

In afternoon trading, MasterCard shares were up $20.18, or 14 percent, at $164.07. Visa shares were up $5.63, or 10.7 percent, at $58.12.

MasterCard shares peaked at $320.30 on May 30, while Visa shares peaked at $89.83 on May 7.

(Additional reporting by Juan Lagorio; editing by John Wallace)