Visa (NYSE:V) is expected to report earnings for the fiscal third quarter of 2012 on Wednesday, 25th July, 2012. The company’s stock continues to perform strongly despite the uncertainty prevalent in the U.S. market driven by an uptick in consumer spending in the U.S. and the growing popularity of mobile wallets where customers can pay for items with their smartphones.
We discuss below a few key trends that influence our $126 price estimate for Visa.
Consumer Spending In The U.S.
The Federal Reserve’s recent reports have shown encouraging signs for consumer spending in the U.S. credit card debt increased by $8 billion in May, the highest increase since 2007.  Total consumer borrowing increased to a four-year high of $2.57 billion indicating growing confidence in the U.S.
Despite these healthy trends, a recent survey by Discover Financial (NYSE:DFS) indicates that more than half (53%) of the consumers in the U.S. expect their spending in to decline in the next few months, as they maintain a cautious view of the country’s economy.  (See Discover Financial Charged For $38 With Diverse Offerings)
Visa, along with peers, MasterCard (NYSE:MA), are expected to allow merchant surcharging in the upcoming months, which will bring the payment solution giants on par with competitors American Express (NYSE:AXP) and Discover Financial and might also erode their market share. We maintain a conservative forecast for Visa’s transaction volumes, with a gradual rise over the next few years.
Debit Numbers On A Slide
Visa has lost over 60% of its debit processing volume since the Durbin amendment to the Dodd-Frank bill, which came into effect last October.  The bill requires banks with more than $10 billion in assets to use separate payment processing networks for signature authorised and PIN authorised debit card transactions.  As a result, debit volumes declined by 8% in May and 12% in April. We expect Visa to continue to lose ground in the debit card market in the coming months.
Mobile Phones And Sports
Visa is looking to augment its digital wallet service, V.me, by adding a secure “Click and Buy” purchase option as well as real time messaging. Although the program is still undergoing beta-testing via four retailers, the company is collaborating with CybeSource gateway to add 400 thousand merchants to its service. A deal with Vodafone will also allow more than 400 million users to access V.me.
Although still in its early stages, mobile payments are gaining increasing popularity and account for 5% of retail store sales in the U.S. Deloitte expects this number to reach 19% by 2016, and Visa, with its innovations, is in a prime position to capitalize. 
The upcoming summer Olympics will also provide a boost for Visa, which is the official sponsor of the summer games. More than 140,000 contactless terminals are expected to be setup across the UK, which will allow customers to make payments on-the-go via Visa’s mobile payment application, Visa payWave using Near Field Communication (NFC) payment facility. (See Visa Expects Mobile Payments Surge At Olympics) With increased merchandise sales expected, we forecast a steady rise in Visa’s cross-border transaction volume. International fees account for 20% of our price estimate for the company’s stock.
Our $126 price estimate for Visa’s stock is concurrent with the current market price; you can gauge the effect of a change in forecast by modifying the charts above.Notes:
- Consumer borrowing up $17.1 billion in May, USA Today, 9th July, 2012 [↩]
- Consumer Confidence Declines in June, According to the Discover U.S. Spending Monitor, Press Release, Enhanced Online News, 3rd July, 2012 [↩]
- Visa Q3 Earnings Preview: DOJ, Post-Durbin, Digital Wallet In Focus, Seeking Alpha, 20th July, 2012 [↩]
- The Durbin Amendment Explained [↩]
- Smartphones will influence 19pc of retailers’ sales by 2016: study, Mobile Commerce Daily, June 28th, 2012 [↩]