Visa (V) Troubled by Currency, Expenses, Taxes & Competition

On Dec 21, we uploaded our research report on Visa, Inc. V, a leader in global payments.

Visa undoubtedly remains a major player in the payment processing industry. Yet, earnings of this company are anticipated to face pressure from foreign exchange volatility as well as higher incentives, rebates and expenses in the coming quarters.

Currency fluctuation, along with higher volume and support incentives passed on to customers and intermediaries, might thwart expected revenue growth. Client incentives in 2016 are projected to be higher than that in fiscal 2015 due to expected renewals in 2016, and the USAA (mid-year) and Costco (late-year) conversions. This is also validated by management’s estimation of incentives, as a percentage of gross revenue, of about 17.5–18.5% for fiscal 2016.

The tax rate, which is expected in the low-30s, will also create as much as a 2% headwind for 2016 earnings per share.

Moreover, Visa faces foreign exchange headwinds. Foreign currency is expected to adversely impact revenue by 3% in 2016. Going forward, the company’s growth is predicted to remain sluggish in comparison to prior years. This is evident from its top-line growth guidance of high single-digit to low double-digit range on a constant dollar basis.

At the same time, Visa faces several state and federal lawsuits related to interchange rate violation, currency conversion practices and pricing structure.

A number of alternative payments systems have gained popularity in recent times, particularly in the area of Internet-based payments such as PayPal, Bill-Me-Later, etc. Given the rapid acceptance of these alternative systems, Visa may lose part of its share in the paperless payments market.

Visa currently carries a Zacks Rank #4 (Sell). Some better-ranked players in the space are Global Payments Inc. GPN, Total System Services, Inc. TSS and Fiserv Inc. FISV. All these stocks carry a Zacks Rank #2 (Buy).

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