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Here are two important facts if you're a trader:
First, research firm Nielsen just reported that global consumer confidence is at its highest level since 2007. Second, in March, U.S. consumer spending rose at the fastest pace in nearly five years.
Mastercard (NYSE: MA), the world's second largest credit card company, is a clear beneficiary of heightened consumer activity.
The company recently reported strong first-quarter results. Revenue for the period swelled 14% year over year to $2.2 billion as people around the globe plunked down their credit cards. Earnings jumped 18% to $0.73 per share.
Mastercard processed 9.8 billion transactions in Q1, 14% more than the same period last year. Worldwide purchases increased 13% from the year-earlier quarter, totaling $759 billion. Of this amount, only 35%, or $268 billion, came from the United States. That represents a 9% year-over-year increase, while Latin America, Asia and Europe all saw strong growth ranging between 11% and 22%.
Management reiterated that it expects revenue growth of 11% to 14% from current levels by 2015.
Several catalysts underlie this strong projected growth. The payment provider just inked two new card agreements with major retailers Wal-Mart (NYSE: WMT), Sam's Club and Target (NYSE: TGT).
Wal-Mart and Sam's Club plan to switch their store cards to the Mastercard platform. Target also agreed to change its RedCard to Mastercard and will use the credit card company's PIN chip technology to increase payment security.
Mastercard also recently announced the acquisition of Asian-Pacific loyalty and rewards provider Pinpoint, which should boost cardholder numbers.
Recognizing that mobile payments and electronic currency are the wave of the future, Mastercard's CEO, Ajay Banga, has restated his commitment to investing in technology and acquisitions that will speed development of mobile and online solutions.
With strong financial results, management has recently taken several shareholder-friendly steps in the form of dividend hikes and share repurchases.
In the first quarter, Mastercard spent about $1.7 billion repurchasing roughly 21.3 million shares.
In February 2012, and again in February 2013, Mastercard hiked its annual dividend, first from $0.01 to $0.03 per share, and then doubled that figure to $0.06 per share. In December 2013, management raised the dividend 83% to $0.11 per share, marking the second increase in 2013. Although the yield is still under 1%, future dividend increases are likely.
The technical picture is also bullish.
Rising off a May 2012 low below $39 (split adjusted), shares formed a major uptrend, more than doubling in just over a year and a half.
In early January, MA hit an all-time high of $84.75, but then retreated, forming a downtrend. Shares consolidated in a rectangle pattern with support near $68 and resistance near $80.
In April, MA tested important support at $68.68. This critical support level was reinforced by the nearby intersection of the major uptrend line. Support held and MA has since moved up into the mid-$70s.
The major uptrend line and the intermediate downtrend line create a symmetrical triangle. If the stock can close above the downtrend line, currently just above $75, I expect it to test $80 resistance. If that level is penetrated, shares should then retest their all-time highs.
The bullish technical outlook is backed by strong fundamentals.
Analysts expect second-quarter revenue will increase 10% year over year to $2.3 billion. For the full 2014 year, they project a nearly 12% increase to $9.3 billion. Q2 earnings are expected to rise 10% to $0.77 per share, while full-year 2014 earnings are estimated to jump 16% to $3.03.
Given this bullish outlook, I plan to go long on the credit card company.
Risks to consider: In a backlash against U.S sanctions over Ukraine, Russia has threatened to develop its own credit payment system to reduce reliance on Western companies. If Russia carries out its threat, Mastercard's growth could be impacted. However, Russia accounts for only about 2% of Mastercard's total revenue. This potential loss should be offset by domestic growth and from future partnerships with retail giants Wal-Mart, Sam's Club and Target.
Recommended Trade Setup:
-- Buy MA on a close above $75.69
-- Set stop-loss at $68.59, just below important lateral support
-- Set initial price target at $84.62 for a potential 12% gain by early fall
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