A Look At Visa’s Performance In 2013
Visa’s (NYSE:V) stock has gained around 45% in 2013, buoyed by strong earnings and prospects of expansion in international markets. [1] Total operating revenues for the fiscal year ending September 30 were up 13% over the prior year as nominal payments volume grew 8%.
As the year winds down, we take a look at Visa’s performance through the year and discuss its growth prospects in the coming years.
Our price estimate of Visa’s stock is $190, implying a discount of 10% to the current market price.
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U.S. Growth Back On Track
Visa is the biggest card processing company in the world, with more than 2.1 billion cards in circulation, nearly double the figure for its closest competitor, MasterCard (NYSE:MA). Visa dominates the U.S. market, accounting for a quarter of personal consumption expenditures (PCE) in the country. [2] The company has around 12,000 issuer clients in the U.S. with long-term contracts with over 600 financial institutions. This dominance adversely affected growth in the first half of the year as the market adapted to the Durbin amendment to the Dodd-Frank bill. The act requires banks with more than $10 billion in assets to use separate payment processing networks.
As a result, Visa lost some ground in the debit card market. The company reported a 7% decline in U.S. debit payment volume for the last three months of 2012, followed by a 4% decrease during the first three months of 2013. Visa was able to check this decline during the June quarter and reported positive volume growth of 10% in the last quarter of the fiscal year. Debit cards are quite popular in the U.S., with debit card transactions accounting for about half of Visa’s nominal payments volume in the U.S., as opposed to 20% outside the U.S. With debit growth back on track, Visa looks set to maintain its position in the U.S. market. The company’s credit payment volume grew 11% last year.
Electronic payment solutions already account for more than 60% of personal consumption expenditures (PCE) in the U.S. [3] so there is not a lot of room for expansion. However, improving economic conditions in the country are expected to drive volume growth for Visa in the years to come. The unemployment rate in the U.S. has recovered from a peak of 10.1% observed during the financial crisis in 2009 dropping to a low of 7% in November. [4] Monthly PCE in the country are up 3% over the prior year, indicating an improvement in consumer sentiment. We expect Visa to leverage its market dominance for future growth as the U.S. economy continues to improve.
Global Outlook
Visa is looking to expand outside the U.S., particularly in Asia, which accounts for nearly half of its international payment volume. In a recent investor meeting, Visa identified a group of developing markets including India, China, Mexico, Brazil, Russia, Indonesia, South Africa and the UAE. The total PCE from these markets is around $10 trillion and has been growing at a double digit rate in recent years.
Apart from China, electronic payment penetration is still low in these markets, with over 60% of the transactions still being carried out through paper-based media. Last fiscal year, Visa reported 10% growth in international nominal payments volume with a 9% increase in credit volume and 19% increase in debit volume. This was lower than the 15% growth rate the company had reported for the year. This decline in the growth rate was partially due to currency exchange rate fluctuations. Last quarter, Visa reported an 8% increase in payments volume from Asia. However, on a constant currency basis, the growth was actually close to 14%.
The potential for international growth is still immense as developing nations adopt electronic payment. Maintaining a high growth rate will be important for Visa, as more than 60% of the company’s payments volume now comes from outside the U.S.
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Notes:- Google Finance [↩]
- Personal Consumption Expenditures, U.S. Department of Commerce: Bureau of Economic Analysis [↩]
- Visa investor meeting for 2013 [↩]
- U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩]