Visa Earnings Preview: Uncertain U.S. Consumer Spending In Focus

by Trefis Team
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Visa (NYSE:V) is scheduled to report earnings for the third fiscal quarter of 2014 on Thursday, July 24. [1] Consumer spending trends in the U.S. and Visa’s association with the FIFA World Cup 2014 should drive the financial performance for the quarter.

In the previous quarter earnings Visa reported a 26% increase in net income, whereas revenue growth slowed down to just 7%. This was a result of slowdown in the U.S. economy as well as the currency fluctuations affecting growth in the Asia-Pacific region. [2]

Our price estimate of $198 for the Visa stock is slightly below the current market price.

See our full analysis of Visa here

Consumer Spending Sentiment In U.S.

The U.S. is one of the largest markets for Visa, accounting for over half of Visa’s payment volumes, which grew 8.5% in the previous quarter. Around 80% of the total value of consumer payment transactions in the U.S. is cashless. [3] Electronic payment penetration in the U.S. is nearly 60% of the personal consumption expenditures (PCE), indicating a mature market where consumer spending sentiment plays an important role in determining growth for the credit card companies. [4]

Metrics such as PCE, personal income and savings determine the growth for credit card companies. According to the Bureau of Economic Analysis, personal income increased 0.4 percent to $58.8 billion in May 2014 from $55 billion in the previous month. For the same period disposable personal income (DPI) increased to $55.6 billion from $50.8 billion. Personal saving as a percentage of disposable personal income was 4.8 percent in May, compared with 4.5 percent in April.  [5] Personal consumption expenditures (PCE) increased $18.3 billion, or 0.2 percent as compared to an increase of just $2.3 billion in April. [6] This indicates an improvement on the expenditure side, but at the same time a higher savings rate points towards low to moderate levels of consumer spending.

The U.S. economy is showing tepid and uncertain growth. In the first quarter of 2014, GDP contracted by 2.9%. [5] On the positive side, unemployment has come down over the last year. With the addition of 288,000 jobs in the month of June, unemployment rate improved to 6.1% for the month ending June. Earlier it had declined to 6.3% in April from a high of over 7% last year. [7]

Given the economic environment, for the second quarter we expect the lower consumer spending to translate to moderate growth for Visa in the U.S. market. Going forward we expect the improving employment, consumption and income levels to nudge consumers into spending more, which would in turn improve growth for Visa.

Growth In Asia Pacific Should Continue

The Asia-Pacific region represents a relatively underpenetrated market for cashless payments, thus differing from the U.S. market, as it provides an opportunity for Visa to focus on increasing the number of credit cards in use in the region. In the previous quarter, company registered a 14% growth in payments volume on a constant currency basis, but 11% on a nominal basis. In the upcoming results, we expect the growth to continue in double digits, but currency fluctuation risks could have an impact.

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Notes:
  1. Q3 2014 Visa Inc Earnings Conference Call, Investor Relations []
  2. Visa’s CEO Discusses F2Q 2014 Results – Earnings Call Transcript []
  3. Cashless Journey Spotlight – USA, MasterCard Advisors September 2013 []
  4. Visa investor meeting for 2013 []
  5. News Release June 25 2014, Bureau of Economic Analysis [] []
  6. Personal Income and Outlays, May 2014 Bureau of Economic Analysis []
  7. Bureau of Labor Statistics []
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