Mastercard (MA-NYSE, $274.33). Beats on Earnings in Q1 but Q2 Appears Frightful.

Mastercard reported revenues and earnings for the first fiscal quarter of 2020. With roughly one month’s impact of consumer and business impact from the SARS-COV2 pandemic, revenue and earnings still surpassed expectations. Revenues for the quarter were $4 billion and EPS (adjusted) totalled $1.83 per share, up from $1.78 per share for the prior year’s first fiscal quarter. This represented a revenue and earnings beat of 2.6% and 6.3% respectively.

Mastercard withdrew guidance for the remainder of the fiscal year. based upon the inability to model consumer spending and government edicts on business closures for the duration of 2020.

There are two points to note. The first point is well understood; revenues in the coming quarters will be bleak. Consumer discretionary spending will continue to be impacted for an indeterminate period of time. The government mandated shutdowns of much of the business world has greatly impacted the ability of the consumer to earn income and to spend that income. Accordingly, expect as much as a 50% decline in consumer DISCRETIONARY spending. This is somewhat offset by an increasing amount of non-discretionary spending that takes place on credit cards such as recurring bill payments and, in certain jurisdictions, entitlement and government program payments.

The second point is not as well recognized and will play out over the coming decade. There has been a reluctance of consumers and businesses to touch actual cash during the viral outbreak. This has resulted in a shift in payment procedures; the trend towards increased usage of credit cards as the preferred payment mode and away from cash has accelerated. After a sufficient period of time, consumer behavior becomes a habit and those who were accustomed to paying for purchases with cash will now become credit card customers. This benefits the payment processors such as Mastercard, Visa and Amex.

Overall, the story of Mastercard and Visa will be one of an extremely difficult year, based upon the sharp decline in consumer discretionary spending. Certain longstanding growth markets, such as travel, may not fully recover for a decade or more. The trend towards credit card usage as the preferred form of payment, away from cash, has accelerated in the past quarter and will continue.

I believe that analysts and investors have not yet accounted for the sharp falloff in revenues at the consumer discretionary spending level in the current quarter. Mastercard and Visa represent investments that benefit disproportionately from consumer discretionary spending. The decline in spending will be more fully felt in the current quarter.

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