Mastercard (MA)

For those of you who follow charts, Mastercard has traced out a head and shoulders pattern which can mean that for the meantime, the stock has topped.

Notice the left shoulder being formed at the end of April '08, the head at the end of May, and then the right shoulder (lower than the left (as it should be) in June.

While this indicates that the chart has topped, this does not mean to short-sell or to buy puts. Short selling requires careful timing and people shouldn't jump into it without learning about it first.

The stock is just too hot right here. Looking at the chart, at $310 MasterCard is trading more than 50% above its 200 day moving average. Anything 30% or higher above its 200 DMA is overbought so MasterCard is majorly overbought here.

Valuation is also stretched here. MasterCard’s net income has been inflated over the last 3 quarters to the tune of about $500 million from the sale of its stake in a Brazilian subsidiary.

Looking at free cash flow, which excludes the gains from these sales, MasterCard brought in about $800 million over the last 4 quarters. With an enterprise value around $38 billion and assuming 20% growth going forward we’re looking at a forward multiple around 40. That’s expensive for a company growing 20-25%.

It’s time to sell.

Weak position in US-based debit card PIN market, which is expected to expand greatly in the upcoming years.

Litigation pending settlement that could reach billions in payments and have unpredictable long term impacts.

Pricing pressure from merged banks with more bargaining power could drive down profitability despite increased transaction volume.

MasterCard, the world’s second-biggest credit-card company, posted a $746.7 million loss on costs to settle an antitrust lawsuit. American Express (AXP) sued MasterCard, along with Visa (V), in November 2004 after the U.S. Supreme Court ruled the companies violated antitrust laws by preventing banks from offering rivals’ cards. MasterCard said back on June 25 would pay as much as $1.8 billion to settle the complaint.

Consequently, the company showed a net loss of $5.74 per share in the second quarter compared with earnings of $252.3 million, or $1.85, a year earlier.

Excluding the expense, profit was $276 million, or $2.11 per share, beating the $2.02 average estimate of 19 analysts. Quarterly revenues grew 25% to $1.2 billion while total operating expenses excluding special items,

increased 14.6% to $830 million. General and administrative expenses increased as well, rising 15.7% on higher compensation for new personnel and bigger severance costs.

Consumers acted more like Scrooge than Kris Kringle during the 2008/2009 Holiday Season, as retail sales were down 5.5 percent to 8%. The use of electronic and card payments are becoming increasingly popular, but sales need to be made in order for payments to register. 73.8% of MA revenues come from transaction fees, so MA needs consumers to spend with their products to receive the bulk of their revenues. If we are in the midst of a recession, consumers will remain stingy with their cards until the light can be seen at the end of the tunnel.