Visa Earnings Preview: Consumer Sentiment, Emerging Markets Penetration Are Key

April 23rd, 2014 by Trefis Team
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Visa (NYSE:V) is scheduled to report earnings for the second fiscal quarter of 2014 on Thursday, April 24. [1] The card giant was sued over high swipe fees by Wal-Mart (NYSE:WMT) last month, [2] but can be expected to maintain the growth it has displayed over the last few years. Visa’s revenues have grown at a compound annual growth rate (CAGR) of nearly 20% for the last six years. For the first fiscal quarter, Visa reported a 9% increase in net income and an 11% growth in revenues. However, total nominal payments volume growth rate fell from 9.6% in the September quarter to 8.2%. This was affected both by currency fluctuations in Asia and a slowdown in the U.S.

In the U.S., Visa reported a volume growth rate of 8.3% for the December quarter, down from 10.3% in the previous quarter. Asia accounts for more than 40% of Visa’s payments volume outside the U.S. As the U.S. dollar strengthened against Asian currencies, Visa’s December quarter nominal growth rate for the region was 7.9%, even though the company reported a 13.8% increase on a constant dollar basis. Taking account of these trends, management issued an FX adjusted guidance of 8% to 11% growth.

Our price estimate of $197 for Visa’s stock is slightly below the current market price.

See Our Full Analysis for : Visa|MasterCard

U.S. Growth Will Depend On Consumer Sentiment, E-Commerce

The U.S. has a high rate of electronic payment penetration; more than 60% of personal consumption expenditures (PCE) in the country are through non-cash transactions. [3] Visa and MasterCard (NYSE:MA) are the biggest mass players in this market; Visa accounts for nearly 22% of the PCE while MasterCard accounts for about 10%. [4] Visa has a high level of merchant acceptance in the country, with over 88 acceptance locations per 1,000 urban households. This suggests that future growth won’t come from increased penetration, but is dependent on consumer sentiment.

In 2013, Holiday season retail sales increased 3.8% over the prior year, but adverse weather conditions in the country led to a 15% decline in customer traffic through November and December. [5] Instead, shoppers preferred to shop from home; total online sales increased 9.3% during the holiday period. This likely contributed to Visa’s slowdown in growth. While Visa and MasterCard enjoy dominance in the physical market, they face tough competition from eBay (NASDAQ:EBAY) in the online domain. eBay’s PayPal reported a 25% increase in total payment volume for the December quarter of 2013.

We expect improving consumer sentiment in the coming quarters as the U.S. economy continues to recover. The unemployment rate has improved from 7.9% at the start of 2013 to around 6.7%. [6] Personal savings as a percentage of disposable personal income dropped from 6.6% during the fourth quarter of 2012 to 4.3% in the December quarter of 2013, suggesting that Americans are once again looking to spend rather than save. [7] We expect Visa to gain from increased spending in the U.S., but will keep a close eye on its performance in the e-commerce market.

Increased Penetration In Emerging Markets

More than 60% of transactions in emerging markets such as India, Mexico, Brazil and Russia are still cash based, but the local-currency PCE growth rate has been higher than 10% for the last four years. Visa is looking to expand in these markets and is rapidly expanding its banking network to issue cards bearing the Visa logo. Visa has around 700 million cards in the Asia-Pacific region, almost the same number as the U.S. However, the average number of transactions per card is just five per quarter, as opposed to 17 for the U.S. We expect both of these metrics to increase steadily over the next few years as Visa expands in this region and consumers adapt to electronic payment media.

However, currency fluctuations might hamper payment volume growth in the coming years. During the December quarter, Visa reported a 13.8% increase in Asia-Pacific payments volume on a constant dollar basis, but the nominal growth was 7.9%. In Latin America, the growth rate was 16% on a constant dollar basis but just 5.6% on a nominal basis.

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Visa (NYSE:V) is scheduled to report earnings for the second fiscal quarter of 2014 on Thursday, April 24. [1] The card giant was sued over high swipe fees by Wal-Mart (NYSE:WMT) last month, [2] but can be expected to maintain the growth it has displayed over last few years. Visa’s revenues have grown at a compound annual growth rate (CAGR) of nearly 20% for the last six years. For the first fiscal quarter, Visa reported a 9% increase in net income and an 11% growth in revenues. However, total nominal payments volume growth rate fell from 9.6% in the September quarter to 8.2%. This was affected both by currency fluctuations in Asia and a slowdown in the U.S.

In the U.S., Visa reported a volume growth rate of 8.3% for the December quarter, down from 10.3% in the previous quarter. Asia accounts for more than 40% of Visa’s payments volume outside the U.S. As the U.S. dollar strengthened against Asian currencies, Visa’s December quarter nominal growth rate for the region was 7.9%, even though the company reported a 13.8% increase on a constant dollar basis. Taking account of these trends, management issued an FX adjusted guidance of 8% to 11% growth.

Our price estimate of $191 for Visa’s stock implies a discount of 15% to the current market price.

See Our Full Analysis for : Visa|MasterCard

U.S. Growth Will Depend On Consumer Sentiments And The E-Commerce Phenomena

The U.S. has a high rate of electronic payment penetration; more than 60% of personal consumption expenditures (PCE) in the country are through non-cash transactions. [3] Visa and MasterCard (NYSE:MA) are the biggest mass players in this market; Visa accounts for nearly 22% of the PCE while MasterCard accounts for about 10%. [4] Visa has a high level of merchant acceptance in the country with over 88 acceptance locations per 1,000 urban households. This suggests that future growth won’t come from increased penetration but is dependent on consumer sentiments.

In 2013, Holiday season retail sales increased 3.8% over the prior year, but adverse weather conditions in the country led to a 15% decline in customer traffic through November and December. [5] Instead, shoppers preferred to shop from home via the e-commerce media; total online sales increased 9.3% during the holiday period. This might have been one of the key reasons why Visa saw a slowdown in growth. While Visa and MasterCard enjoy dominance in the physical market, they face tough competition from eBay’s (NASDAQ:EBAY) in the online domain. PayPal reported a 25% increase in total payment volume for the December quarter of 2013.

We expect improving consumer sentiments in the coming quarters as the U.S. economy continues to improve. The unemployment rate has improved from 7.9% at the start of 2013 to around 6.7%. [6] The personal savings as a percentage of disposable personal income dropped from 6.6% during the fourth quarter of 2012 to 4.3% in the December quarter of 2013 suggesting that Americans are once again looking to spend rather than save. [7] We expect Visa to gain from increased spending in the U.S., but will keep a close eye on its performance in the e-commerce market.

Increased Penetration In Emerging Markets

More than 60% of transaction in countries like India, Mexico, Brazil, Russia, Indonesia, South Africa and UAE are still cash based, but the local-currency PCE growth rate has been higher than 10% for the last four years. Visa is looking to expand in these markets and is rapidly expanding its banking network to issue cards bearing the famous Visa logo.

Visa has around 700 million cards in the Asia Pacific region, almost the same number as the U.S. However, the average number of transactions per card is just 5 per quarter as opposed to 17 for the U.S. We expect both these metric to increase steadily over the next few years as Visa expands in this region and consumers adapt to electronic payment media.

However, currency fluctuations might hamper payment volume growth in the coming years. During the December quarter, Visa reported a 13.8% increase in Asia Pacific payments volume on a constant dollar basis but the nominal growth was 7.9%. In Latin America, the growth rate was 16% on a constant dollar basis but just 5.6% on a nominal basis.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

Notes:
  1. Q2 2014 Visa Inc Earnings Conference Call, Investor Relations [↩] [↩]
  2. Wal-Mart sues Visa for $5 billion over card swipe fees, Reuters, March 27 [↩] [↩]
  3. Visa investor meeting for 2013 [↩] [↩]
  4. Personal Consumption Expenditures, U.S. Department of Commerce: Bureau of Economic Analysis [↩] [↩]
  5. U.S. Holiday Sales Gain Is Smallest Since 2009, ShopperTrak Says, Bloomberg, January 8, 2014 [↩] [↩]
  6. U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩] [↩]
  7. Table 2.1. Personal Income and Its Disposition (A) (Q) [↩] [↩]