Visa Maintains Growth To Surpass Expectations
Visa (NYSE:V) beat market expectations for the second fiscal quarter of 2014, with net income increasing 26% over the prior year. [1] However, investors were deterred by a slow-down in revenue growth, from 15% in the March quarter of 2013 to 7% in the current quarter. [2] This decline was largely due to the non-recurrence of certain favorable one-time adjustments which affected income in 2013 as well as FX headwinds; the constant currency growth rate was 9%. The 2% negative impact was in line with the guidance provided by management last quarter. Going forward, the company expects the revenue growth rate to be around 10% to 11% through the fiscal year, with a 2% negative impact from currency fluctuations.
Our price estimate of $191 for Visa’s stock implies a slight discount to the current market price.
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Operational Performance
Visa primarily earns fees from its financial clients, who issue cards bearing the Visa logo to customers. Data processing fees are charged for providing authorization, clearing, settlement, maintenance and network access services provided on a transaction to transaction basis. These fees are charged as a percentage of the total transactions processed for a client. Service fees, or assessment fees, are charged on the dollar volume of transactions processed for a client for a domestic transaction. For an international transaction, when the issuer bank and the acquirer bank are in different countries, the company charges international transaction fees on the basis of the cross-border volume of transactions. Therefore, the three main metrics for assessing Visa’s performance are transaction volume, payment volume and cross-border volume.
Growth In The U.S.
More than half of Visa’s payment volume comes from the U.S. and the company reported an 8.5% increase in the figure for the March quarter. This rate was higher than the 4.3% growth observed last year and increased to 12% in the first 21 days of April. The U.S. has a high level of electronic payment penetration; nearly 60% of personal consumption expenditures (PCE) in the country are from non-cash transactions. [3] This suggests that future growth is more likely to come from improving consumer sentiment than increased penetration.
Visa is the biggest mass player in the market, with a market share of 22% of PCE. ((Personal Consumption Expenditures, U.S. Department of Commerce: Bureau of Economic Analysis)) The company has a high level of merchant acceptance in the country, with over 88 acceptance locations per 1,000 urban households. We believe that Visa is poised to gain from the ongoing economic recovery, which saw both the disposable personal income and personal consumption expenditures grew 0.3% through January and February. [4] 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. [5]
Focus On Asia
Outside the U.S., Visa is focused on the Asia Pacific region for growth; around 30% of the company’s payment volume comes from the region and it has more than 700 million cards in force, the same number as in the U.S. However, the higher population of the Asia Pacific region suggests that there is opportunity for penetration in the region, and Visa is looking to leverage its international network and reputation to gain ground. During the last quarter, Visa acquired 100% ownership of GP Net, which was a joint venture between Visa and seven leading Japanese issuers. This will allow the company to streamline its domestic processing activities in Japan. Visa also launched a debit card in the country in collaboration with the Bank of Tokyo-Mitsubishi, one of the largest banks in Japan.
Japan is the third-largest economy in the world, but has a very low level of electronic payment penetration; only 14% of PCE are through payments cards, with Visa maintaining a market share of 8%. We believe the company can attain increased penetration and further growth in the country through the coming years. However, currency fluctuations will be a concern; Visa reported a 14% increase in payment volume from the Asia Pacific region for the March quarter on a constant dollar basis. But on a nominal basis, this growth rate was just 11%.
Transactions and Cross-Border Volume
Transaction volume increased 11% in the second fiscal quarter and the company reported a growth rate of 14% for the first 21 days of April. We expect further growth in this metric as the company continues to expand in Asia and the U.S. economy improves.
Meanwhile, cross border volume grew 8% on a constant dollar basis, but the growth rate was down 4 percentage points from the December quarter. Management attributed this slowdown to weakness in Latin America. Additionally, the U.S. government has imposed sanctions on Russia, and Visa has had to suspend activities with two banks in the country. However, these banks account for only 1% of the company’s volume in Russia and should not have a big impact on earnings. However, we will keep an eye on further developments and update our model accordingly.
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