Visa Earnings Preview: Transaction Growth backed By Strong U.S. Economy, FX Headwinds To Continue
Visa (NYSE:V) is scheduled to report earnings for the first quarter of 2015 on Thursday, April 30. During the quarter ended December 31, the company reported net income of $1.6 billion, an 11% year-over-year increase and net operating revenue of $3.4 billion, a 9% year-over-year increase on a constant dollar basis. The increase in revenue was primarily driven by growth in payment volume, transactions processed and cross border transactions. Visa reported a volume growth rate of 11% and processed transaction growth of 10% for the December quarter. The continued strengthening of the U.S. dollar slowed growth in the Asia Pacific, Canadian and Latin American region in the last quarter.
Visa’s continued efforts to tap into the mobile payment space, accompanied by the gradual improvement of the U.S. economy, is likely to drive growth for the first quarter of 2015. However, revenues earned from the international market may take a hit due to the strengthening U.S. dollar.
We have a price estimate of $68 for Visa’s stock, which is in line with the current market price.
See Our Full Analysis for Visa
U.S. Economy To Drive Consumer Spending
Visa derives around 56% of its operating revenues from operations within the U.S. According to a research by MasterCard, cash penetration in the U.S. is around 54% of Personal Consumption Expenditures (PCE), indicating that around 46% of consumer spending is non-cash, while regions such as Latin America, Asia and Europe have cash penetration levels of around 92%, 93% and 77% percent, respectively. This also suggests that Visa’s future growth in the U.S. is more likely to come from improving consumer sentiment rather than increased non-cash penetration. [1] Consumer sentiment is largely affected by macroeconomic factors, which have seen improvement over the past year.
The unemployment rate in March declined to 5.5%, [2] while Real Disposable Personal Income increased by 0.2% in February compared to a 0.9% increase in January, and personal savings as a percentage of disposable personal income was 5.8% in February compared to 5.5% in January 2015. [3] While there have been some setbacks in the last few months, we expect the overall trajectory of the U.S. economy to spur spending in the first quarter.
International Penetration, FX Headwinds To Slow Growth
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. Accordingly, these revenues are vulnerable to foreign exchange volatility. The continued strengthening of the U.S. dollar against major currencies such as the Yen and Australian Dollar in the last quarter hampered the company’s revenue growth in the Asia Pacific region. During the December quarter, Visa reported a 10.6% increase in Asia-Pacific payment volume on a constant dollar basis, but the nominal growth was 5.7%.
The number of Visa cards issued in the Asia Pacific region has been growing at a faster rate than cards issued in the U.S. Both the U.S. and Asia Pacific had about 720 million cards at the end of 2013. However, as of September 2014, Visa had around 770 million cards in Asia-Pacific, and the U.S. had about 750 million cards. Despite the increase in the number of Visa cards in Asia Pacific, the average number of transactions per card is just five per quarter, as opposed to 16 for the U.S. With the company continuously making efforts to expand its footprint in the international market, we expect the number of transactions per card to increase steadily in the near term as consumers adapt to electronic and mobile payment media. The last quarter saw Visa making consistent efforts to continue gaining market share within the mobile payment space. In March 2015, Visa and Airtel entered into an agreement to bring mobile payments to 7 countries in Africa. They already rolled out their services in Kenya with 6 other countries to follow.
However, we expect that currency fluctuations will continue to impact earnings in the first half of 2015.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
Notes:- MasterCard Incorporated 2014 Investment Community Meeting, Press Release [↩]
- Employment Situation Summary, Bureau of Labor Statistics [↩]
- Personal Income and Outlays, Bureau of Economic Analysis [↩]