We reiterate our recommendation on Visa Inc. (V) at Neutral based on the its comprehensive portfolio diversification efforts amid the regulatory sting on debit card segment.
The company’s operating earnings in the third quarter of fiscal 2011 came in at $1.26 per share. These were three pennies ahead of the Zacks Consensus Estimate of $1.23 per share but substantially exceeded 96 cents per share reported in the year-ago quarter on lower share count.
Results exceeded expectations due to better pricing, increasing processed transactions and higher cross border volumes, partially offset by higher expenses. While increased free cash flow outlook in 2011 paves way for ample growth opportunities, capital deployment through strategic acquisitions and alliances, stock buybacks and dividend payouts further enhances investors confidence.
Moreover, given that the regulatory hassle is expected to hurt revenue from debit transactions, Visa is exploring new avenues of growth by investing in new processing and service platforms to facilitate more convenient and innovative payment methods, such as money transfer, mobile and prepaid payments along with eCommerce.
The company has been posting strong double-digit growth in global eCommerce payment volumes in the past three quarters, which reflects healthy fruition of its initiatives.
The recent acquisitions of CyberSource, PlaySpan and Fundamo along with other strategic alliances with Isis, Monitise, CashEdge and Fiserv further complement Visa’s latest eCommerce growth strategy.
Visa also enjoys an industry leading position among its peer group with respect to total payments volume, total transactions and total number of cards in circulation, all of which drove double-digit growth in fiscal 2010 and in the first nine months of fiscal 2011.
We believe the company’s current 11–15% net revenue growth is reasonable considering the current volatile global cues. Although top-line growth is expected to be moderate in 2012, going ahead the company is likely to regain momentum once the regulatory cloud clears and the global economy stabilizes.
Despite the economic turmoil that eroded the reserves of most of the organizations, Visa enjoys a strong cash and available-for-sale investment position along with strong free cash flow reserve, posing a risk-free balance sheet.
On the flip side though, the deteriorating credit quality of the market amid the ongoing economic volatility continue to retard desired credit card growth. The regulatory and economic turmoil has further resulted in substantial consolidation in the banking industry that has hampered the credit card growth also pressuring the fees charged to customers and pricing discounts.
Moreover, currency fluctuations along with higher volume and support incentives passed on to the customers and intermediaries also lowered the expected revenue growth.
Besides, the regulations also impose numerous costly new compliance burdens on the company. The recent ceiling in interchange fees on debit transactions to 21 cents, substantially down from the previous average of 44 cents, further affects Visa’s revenue prospects since the company is more exposed to the debit processing market than its prime peer MasterCard Inc. (MA).
The global payments industry is intensely competitive and stands to nibble into Visa’s market share. Increased litigation and operating expenses further weigh on the financials.
On account of these factors, Visa’s growth is expected to slow down in 2012, which is also reflected from its top line growth guidance in high single-digit to low double-digits range and bottom-line growth in the middle-to-high teens.
Hence, the Zacks Consensus Estimate for the fiscal fourth quarter of 2011 is currently pegged at an earnings of $1.26 per share, up about 30% year over year. In the last 30 days, 12 of 26 firms covering the stock increased their estimates for the upcoming quarter, while 7 downward revisions were witnessed. For fiscal 2011, we estimate earnings of $4.96 per share, up 27% over fiscal 2010.
Additionally, the quantitative Zacks Rank for Visa is currently #3, indicating no clear directional pressure on the shares over the near term.
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VISA INC-A (V): Free Stock Analysis Report
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