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MasterCard faces $18 billion lawsuit in UK

MastercardThe share price of electronic payment service provider MasterCard Inc. (NYSE: MA) has started to retreat once again after hitting the $100 mark. The stock made numerous valiant attempts to break the $100 barrier in the past six months. However, it was not able to do so.

Following the announcement of fiscal 2016 second-quarter results that exceeded the analysts’ estimates, the market participants anticipated the stock to break the resistance in a comfortable manner.

After trading briefly above 100, the stock had fallen once again.

For the reasons provided below, we believe that the share price of MasterCard will remain range bound with negative bias in the short-term.

The stock closed Tuesday’s trading session at $99.39.

Mastercard

During the second-quarter, the net revenue of MasterCard increased 12.5% to $2.694 billion, from $2.390 billion in the corresponding quarter of 2015. The Zacks revenue estimate for the second-quarter was $2.6 billion.

The Purchase, New York-based company recorded Q2 2016 net income of $983 million or $0.89 per share, compared to $921 million or $0.81 per share in the Q2 2015.

Excluding charges, the credit card issuer reported second-quarter net income of $1.061 billion or $0.96 per share, up from $965 million or $0.85 per share in the corresponding quarter of 2015. The Wall Street’s earnings estimates were $0.90 per share for the second-quarter.

Nearly one year has passed after the company started shifting to chip based cards. As of July 2016, nearly 88% of the consumer credit cards in the US are chip based. MasterCard stated that the shift has resulted in a 54% decline in the counterfeit fraud costs. Counterfeit fraud increases at a rate of 77% every year in the US at the non-chip based merchant outlets.

The jubilant mood in the market, however, did not last for long. In the UK, a lawsuit for 14 billion pounds ($18.6 billion) was filed by a person named Quinn Emmanuel alleging that MasterCard charged exorbitant fees between 1992 and 2008. The case was filed on behalf of Walter Merricks, an ex-ombudsman of the UK financial services. Under the Britain’s Consumer Rights Act, nearly 46 million citizens of the UK who have used the card to make payments will now become a claimant automatically in the case. In the US courts, both MasterCard and its competitor Visa card faced a $6 billion class-action lawsuit filed by merchants in 2005. The ruling came in favour of the merchants in 2013.

So, analysts believe that MasterCard may face a similar situation again. Thus, it is amply clear that the share price has little chances of upside in the current circumstances.

The stock is currently declining after facing resistance at 100 levels. The first and the second support for the stock exist at 97 and 92 respectively. The stochastic reading of about 70 indicates that the decline has started just now. So, we can expect the stock to break the S1 level and test the S2 level.

Mastercard Stock Price: September 14th 2016

To profit from the probable steep fall in price, we recommend purchasing a one touch put option for a binary broker of choice. The target price for the put option should be greater than $92. Likewise, the expiry date of the contract should fall in the second week of October.


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