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Eyeing a Recovery Through MasterCard's Lens

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When people decide to buy, they're using plastic.

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Profits are up at MasterCard (MA), thanks to a greater number of transactions as consumers continue to shift to debit and credit cards and away from cash and checks.

MasterCard says the number of transactions processed in the third quarter increased 7.6% from the same period a year ago to 5.8 million. However, the volume of purchase made by cardholders remained nearly flat.

Earnings of the nation's major credit card companies -- MasterCard, Visa (V), and American Express (AXP) – suggest that the worst of the economic slump may be behind us. But it's far from over.

"The economic downturn has continued to affect consumer and business spending during the quarter," Robert Selander, MasterCard's CEO, said during a conference call with investors, according to the Associated Press. "We don't expect any global economic improvement until sometime in 2010."

MasterCard and Visa, operator of the world's largest consumer payment system, are shielded from the consumer defaults caused by the economic downturn because they charge a fee for each transaction rather than lending.

Some banks, including Bank of America (BAC) and Citigroup (C), have closed some consumer credit card accounts in an effort to reduce defaults. This pushes consumers to debit cards that automatically deduct money from a user's checking account. MasterCard and Visa also generate fees from debit cards.

Typically, credit card defaults track the unemployment rate, which hit 9.8% in September. October's rate is scheduled to be released November 6.

MasterCard said net income totaled $452.2 million, or $3.45 a diluted share, compared with a loss of $196.6 million, or $1.48, for the same period a year ago. The loss resulted from a $515.5 million after-tax charge to settle a lawsuit with Discover Financial Services (DFS), which alleged MasterCard and Visa illegally prevented banks from issuing its cards.

Analysts expected MasterCard to earn $2.94 a share. MasterCard's stock lost 4.4% in midday trading as the broader markets also fell.

On October 23, Visa reported fourth-quarter net income of $514 million, or $0.69 a share, compared with a loss of $356 million, or $0.45, a year ago stemming from the settlement of the antitrust lawsuit with Discover.

Visa said payment volume declined 1% in the fourth quarter, an improvement from the 3% decline for the third quarter ended June 30. Spending increased 1% in the final month of the fourth quarter ended September 30 and grew 3% in the first three weeks of the month.

Visa said payment volume fell 2% from the same period a year ago to $687 billion, but the number of consumers carrying Visa cards rose 5% to 1.7 billion, and this suggests future revenue growth. The total number of transactions for the three months ended September 30 rose 9% over the same period a year ago to 10.5 billion, an indication the recession is abating.

In midday trading Tuesday, Visa's stock lost 1.2%.

American Express, which pegs its cards to upper-income consumers, last month said third-quarter income fell 25% to $642 million, or $0.54 a share, from $861 million, or $0.74, for the same period a year ago.

But total consumer spending in the third quarter rose to $156.6 billion from $151.4 billion in the preceding quarter. The company said card write-offs in September fell for the fifth month in a row, suggesting consumers are regaining their footing as the recession eases.

Warren Buffett's Berkshire Hathaway (BRK.B) made a good bet investing in American Express: The 52-week range is $9.71 to $37.17, a gain of 282.8%. In midday trading, the stock was off 1.3% to $35.20. In October, analysts at Sanford C. Bernstein & Co. said the stock was fully valued. In midday trading, shares of American Express lost 1.9%.


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No positions in stocks mentioned.
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