MasterCard (MA, $159.50, up $15.61) is having a stellar morning after reporting earnings that beat Wall Street’s expectations. The results were a mixed bag of tricks as MasterCard had to pony up over $500 million to settle some legal matters with Discover Financial Services (DFS, $12.55, up $0.56).
To start, MasterCard reported earnings of $322 million, or $2.47 a share versus $314 million, or $2.32 a share in the same quarter a year earlier. Wall Street had expected earnings of $2.22 a share. However, MasterCard actually had a net loss of $194 million, or $1.49 a share, for the third-quarter after paying out the $515 million.
It’s always good to get litigation issues out of the way because they can bog down a company’s bottom line and the negative publicity often times associated with them doesn’t help the stock’s PR image.
There are two sides to every stock where some people either love it or hate it. The bulls will argue that MasterCard will reap the rewards of a paperless world while the bears argue that consumer spending will curb because of the global slowdown. I’m in the bulls camp as I think MasterCard, to a degree, has been unfairly punished by the market sell-off. Remember, it’s the banks that are responsible for consumer credit defaults, not MasterCard’s.
The stock has fallen from a 52-week high of $320 and has hit a low of $120. Just like $320 may have been on the high side as far as valuation for MasterCard, $120 may have been too low. Right now, the stock is 50% off its high.
The November 150 calls (MALKL, $9.20, up $4.10) would have been a good bet if you had priced in a 10% move in MasterCard before earnings. Playing options around earnings are always risky plays but it would have been an 80% return today. It is also interesting to see that there is some action in the January 2010 320 calls (KZQAT, $9.20, up $3.50). These options do not expire until January 15, 2010.
Basically, there are a few option traders that either believe MasterCard will be a $300 stock again and they are buying these calls or they are selling them and keeping the premium because they think the opposite.
The November calls may have a little more room to run and the market is doing well two hours into the trading session. The Dow is up 270 to 9,590. I had mentioned the Dow was making a run to 10,000 and it could be the tide that lifts all boats. But…keep watching the market because the next 24 hours will be crucial in which way the market’s momentum will head over the next few weeks.
Rick Rouse
Rick@OptionsMentoring.com
