Visa (NYSE:V) reaped the benefit of higher credit cards spending over the last three months as the company reported strong results for the second quarter of the fiscal year, on Wednesday, 2nd May, with a net adjusted income of $1.1 billion, or an EPS of $1.60, a 23% increase over last year’s figure of $881 million.  Visa’s strong performance this quarter is indicative of a healthy upward trend observed in retail spending which is also likely to have a positive impact on its competitors MasterCard (NYSE:MA), Discover Financial (NYSE:DFS) and American Express (NYSE:AXP).
Incentive Initiatives Helped In U.S. Market
Visa offers several incentives to attract customers as well as banks and issuers to persuade them to carry their trademark logo on the cards issued by them. Spend on incentives this quarter was increased to $497 million from $451 million in the last quarter. This the investment paid off for Visa, as payment volumes across the U.S. saw an increase of 6% for all products.
Visa also announced that it had signed 9 of the 10 top card issuers in the U.S. to deals extending to 2015, which secures a large amount of transaction volume for Visa. The company revealed plans to increase the minimum purchase amount for which a PIN number is not required, from $25 to $50 from October this year, in a move to attract more customers.
Debit card performance however was disappointing, with only a 4% growth in transactions observed. Transaction fees account for 28% of our price estimate of Visa’s stock.
Strong Performance Across International Geographies
Latin America has been a strong performer for Visa, with 9 consecutive quarters of consistent growth in payment volume. It saw an increase of 25% this quarter with exceptional results from Brazil as the company announced an agreement with a large Brazilian bank for 50% of its card portfolio. The Asia Pacific region also delivered, with increased strategic penetration by Visa into emerging markets coinciding with economic growth. International expansion led to an increase in cross-border transactions, which account for 20% of our price estimate for Visa.
Innovation in Technology
Visa announced agreements with several mobile network operators and mobile device manufacturers, to expand its market share in the mobile payments revolution. Plans to develop a virtual wallet in collaboration with Vodafone were announced along with an agreement with Intel to make Visa payWave the standard payment application for Intel’s mobile handset devices, which are to be launched in the near future. Collaboration with pioneers Google Wallet and Isis have allowed Visa to assume a leading position to benefit from the anticipated boom in mobile payments.
Legal Hurdles Blemish Positive Report
Visa disclosed that it received a civil investigative demand from of the U.S. Department of Justice, which seeks to investigate Visa’s compliance with federal regulations which limit debit-card processing fees. The company however, does not view this as a hindrance as it believes that its actions over the last quarter have been in accordance with the regulations, and have been discussed twice already with the authorities.
We have a price estimate of $90.05 on Visa’s stock, about 25% below its current market price; we plan to revise the same shortly.Notes:
- Visa’s CEO Discusses Q1 2012 Results – Earnings Call Transcript, SeekingAlpha, May 2nd, 2012 [↩]