Earnings Preview: Visa To Gain From Holiday Spending But FX Headwinds A Concern
Visa (NYSE:V) is scheduled to report earnings for the first fiscal quarter of 2015 on Thursday, January 29 [1]. During the quarter ended September 30, the company’s revenues grew by 10% year-over-year on a constant dollar basis on the back of consistent growth in payment volumes. [2] Growth came from both the U.S. and international markets, where payment volumes and total transactions processed exhibited high single-digit growth rates. However, growth during the quarter was also adversely affected by FX headwinds. As a result of favorable growth in key metrics as well as the share repurchase program that was announced, Visa’s stock has gained over 20% during the past three to four months.
We expect this quarter’s earnings to be driven by increased consumer spending during the holiday season and continuous improvement in the U.S. economy. We also expect foreign currency fluctuations to negatively affect the company’s international revenues. Below we review the key trends that will impact Visa’s performance in the quarter. We have a price estimate of $269 for Visa’s stock, which is slightly higher than the current market price.
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U.S. Economic Growth, Holiday Spending To Boost Revenues
The state of the U.S. economy greatly affects Visa’s performance as the company derives around 55% of its operating revenues from the U.S. In the last three months of the year, a quarter which is highlighted by the holiday season, there has been a considerable pick up in the U.S. economy. In December, the unemployment rate fell by 0.2% over the previous month to 5.6%, compared to 6.6% at the beginning of 2014. [3] Real Disposable Personal Income increased by 0.5% (over the previous month) in November compared to a 0.3% increase in October. [4] Personal savings as a percentage of disposable personal income was 4.4% in November compared to 4.6% in October of the same year, indicating that people were more open to spending. Real Personal Consumption Expenditures increased by 0.3% in November compared to October.
In addition to an improving U.S. economy, falling gas prices gave a boost to consumer sentiment in the last quarter. During the period, holiday spending gained momentum, aided by an increase in online sales. According to the National Retail Federation, holiday retail sales grew by 4% to $616.1 billion for the months of November and December. [5] However, there was a greater increase in online sales, which grew by 6.8% to $101.9 billion. The period between Thanksgiving and Cyber Monday accounts for a significant portion of consumer spending in the holiday season. 2014 holiday season online sales increased by 12.6% for the five-day period between Thanksgiving and Cyber Monday, and mobile sales increased by 27%. [6]
For the quarter ended September 30, Visa benefited from increased payment volume and cross border volume, registering 11% and 10% year-over-year growth, respectively. (Visa Inc. Reports Strong Fiscal Fourth Quarter Adjusted Earnings Per Share Growth of 17% and Full-Year 2014 Adjusted Earnings Per Share Growth of 19% and Announces a New $5.0 Billion Share Repurchase Program, Business Wire)) We expect that the increase in consumer spending during the last three months will provide an uptick to these metrics and drive growth for the company.
In October, Visa entered into a partnership with Apple for the latter’s new mobile payment solution, Apple Pay. Visa also made investments to upgrade technology for expanding its mobile payment solutions in the long term. Going forward, it will be interesting to see the extent to which Visa’s partnership with Apple and foray in mobile payment technology contribute to the growth of non-cash transactions. We will be keeping a close eye on new developments as they emerge.
Strengthening Of U.S. Dollar Likely To Affect Earnings
Visa derives around 44% of its operating revenues from operations outside of the U.S. (excluding Europe). For Visa, international transaction revenues are primarily earned through cross border transactions and currency conversion. Therefore, these revenues are vulnerable to foreign exchange volatility. The continued strengthening of the U.S. dollar in the last quarter is likely to have a dampening effect on the company’s revenue growth. For instance, the drop in the yen and the Australian dollar is likely to negatively affect revenues from the Asia Pacific region. ((Yen Defies Oversold Signals in Race to 7-Year Low Versus Dollar, Bloomberg)) [7]
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More Trefis Research
- Visa Inc. To Announce Fiscal First Quarter 2015 Financial Results on January 29, 2015, Press Release [↩]
- Visa Inc. Reports Strong Fiscal Fourth Quarter Adjusted Earnings Per Share Growth of 17% and Full-Year 2014 Adjusted Earnings Per Share Growth of 19% and Announces a New $5.0 Billion Share Repurchase Program, Visa Press Release [↩]
- Employment Situation Summary, Bureau of Labor Statistics [↩]
- Personal Income and Outlays, Bureau of Economic Analysis [↩]
- Retail Holiday Sales Increase 4 Percent, National Retail Federation [↩]
- Cyber Monday Caps Record Five-Day “Cyber Week” Driven by Mobile Shopping, According to IBM Digital Analytics Benchmark, IBM [↩]
- Google Finance [↩]