Visa’s Global Growth Supports Its Outlook
Visa (NYSE:V) reported a strong performance during the fiscal third quarter of 2012 as adjusted net income increased 20% year-on-year to $1.1 billion. [1] The adjustment was due to a litigation provision of $4.1 billion related to a settlement agreement with merchants discussed in our article Visa And MasterCard Face The Heat To Reduce Fees. A 10% increase in payments volume in the U.S. was the main driver for the company’s operations as net operating revenues rose 10% to $2.6 billion. We discuss below a few key takeaways from Visa’s earnings announcement.
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Global Expansion
Over 30% of consumer spending worldwide is still carried out through cash and checks, accounting for $10 trillion in gross dollar volumes. This trend is particularly prominent in developing countries in Asia, Latin America and Central Europe, Middle East and Africa (CEMEA) providing huge potential for growth for Visa. The company has been successful in penetrating these markets over the last few years and establishing a strong customer base. The aforementioned regions reported respective growth of 13%, 20% and 41% in payment volumes in the last three months. As consumers worldwide adopt digital currency, Visa will look to leverage its reputation as a leading payment solutions provider to fuel further growth in volumes.
Russia, in particular is a huge market for Visa to expand into as over 80% of consumer spending in the country is cash based. The company has recognized this potential and is focusing on expanding card usage in everyday spend. Visa cards are now accepted by the country’s largest grocery chain, Mutney, which operates more than 5,000 stores. Visa has also launched Shariah-compliant credit products to build operations in the Middle East. With global expansion on the company’s behalf and an improving economic outlook in the U.S. fueling consumer confidence, we expect transaction volumes to increase steadily through our forecast period.
Debit Volumes Fall As Expected
The Durbin amendment to the Dodd-Frank bill, which came into effect last October, has cost Visa its share in the U.S. Debit card market. The bill requires banks with more than $10 billion in assets to use separate payment processing networks for signature authorized and PIN authorized debit card transactions. [2] This means that banks have to turn to Visa’s competitors such as MasterCard (NYSE:MA), American Express (NYSE:AXP) and Discover Financial (NYSE:DFS) to process transactions executed via debit cards, that were previously processed by only Visa. As a result, Visa’s debit payments volume fell by 9% during the June quarter. However, volumes will stabilize in the long-term, as the compliance is adopted throughout the market.
Summer Fun
Global cross-border volumes, which account for 20% of Visa’s stock value, grew 14% over the three months ending June. This number will be boosted significantly by the 2012 Olympic games, which will be held in London over the next few weeks.
Visa has been the official sponsor for the last 13 editions of the games, which have historically driven growth in tourism and merchandise sales. This year, the company has collaborated with over 1,000 financial institutions and merchants worldwide to support its operations during the course of the summer extravaganza. This represents an increase of 70% in partnerships from the event in Beijing, held four years ago. (See Visa Expects Mobile Payments Surge At Olympics)
Our $126 price estimate for Visa’s stock is in line with the current market price as we believe the markets have correctly accounted for the future growth in the company’s operations; you can gauge the effect of a change in forecast by modifying the charts above.
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Notes:- Visa Management Discusses Q3 2012 Results – Earnings Call, Seeking Alpha, 25th July, 2012 [↩]
- The Durbin Amendment Explained [↩]