Thursday, April 30, 2009

Visa (V) Beats the Street

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The chart for Visa (V) shows how stocks can explode once they peek their head over the 200 day moving average; of course solid earnings last night did not hurt one bit. The question with this type of company is as credit card spending slows, are (a) debit cards offsetting it and (b) how are international regions doing as that is where the true secular growth is (moving from cash based societies to plastic) At this time, the answers to the latter two questions are good enough as the low expectation game continues to march onward. Visa is now at levels last seen before the fall crash.

This is one of the few subsectors I'd actually be ok with investing in and coming back in a decade since there is such a strangehold by so few players, along with the business model. If you are new to the blog or the sector, remember we like this are because there is zero credit risk - these are purely transactional companies - each time a purchase is made they take their pound of flesh. Rinse. Wash. Repeat. There is a lot of insight on the global economy to be had from reading through the earnings report and seeing the commentary. Full report here.

Again we're now talking 25x forward earnings at today's prices, but valuations have been thrown out the window as people chase anything at any price. I guess 30-35x forward earnings will indeed be ok in the paper printing prosperity era that jacks up the value of every asset class.... including stocks.

A quick round up of earnings - via Reuters
  • Visa Inc (V) posted better-than-expected quarterly earnings on Wednesday as the world's largest credit card network increased prices, slashed expenses and consumers used debit cards more. Net income rose 70 percent to $536 million, or 71 cents per diluted class A share, for the second quarter ended March 31, compared with a profit of $314 million, or 39 cents per diluted share, a year earlier. On an reflecting a normalized tax rate, restructuring and purchase amortizations, quarterly net incomeadjusted basis, rose 38 percent to $553 million, or 73 cents per diluted class A common share. On that basis, analysts expected earnings of 64 cents per share, according to Reuters Estimates.
  • Adjusted operating expenses fell 5 percent to $745 million, as the company cut personnel, advertising and marketing, as well as consulting fees, and administrative costs.
  • "What caught my attention most was the expense control they had. For instance, advertising falling from $210 million to $196 million. Their ability to cut costs in this environment is surprising," said Ken Crawford, senior portfolio manager at Argent Capital Management. "It speaks of the flexibility and profitability of card processor companies."
  • Net operating revenue rose 13 percent to $1.6 billion, while total processed transactions -- which represent transactions processed by VisaNet -- increased 6 percent to 9.4 billion. Visa said payments volume fell 1 percent for the quarter ended Dec. 31, which translates to revenue in the following quarter.
Guidance
  • Visa forecast further pressure on its revenue in the second half of its 2009 fiscal year, which ends in September, hurt by foreign exchange headwinds as the U.S. dollar strengthened in recent months and lower cross-border transactions given the global economic recession. But the company anticipated a recovery from October helped by more favorable year-over-year gas prices and foreign exchange rates, if the global economy shows signs of improvement.
  • Visa increased its forecast for its annual adjusted operating margin to the low 50 percent range from a range of the high 40 percent to the low 50 percent range. (big positive)
  • The company affirmed its forecast of an annual net revenue growth of high single digits in 2009 and at the lower end of the 11 to 15 percent range in 2010. Visa also reiterated its annual adjusted diluted class A common stock earnings per share will grow over 20 percent.

Now for the more macro views
  • However, the company has seen a slowdown in the growth of revenue and transaction volumes as battered consumers used their credit cards less. Still, debt-burdened consumers have been increasing the use of their debit cards.
  • "The continued strength of debit is attributable in part to that product's strong correlation with non-discretionary spend categories, which are holding up relatively well in the face of a tough economy," Chief Financial Officer Byron Pollitt said in a conference call with analysts.
  • "In fact, in the quarter ending December, for the first time in Visa's history, U.S. debit payment volumes eclipsed that of credit," Pollitt added. (this speaks to how advanced the US is in moving away from cash and to plastic - many other emerging markets are only in the infant stage of this switch)
  • Payments volume fell 7 percent in credit in the United States to $203 billion, while debit volumes grew 5.5 percent to $206 billion.
  • In addition, Visa said debit grew in the first four months of 2009, while credit shrank. (this squares with the reduction in credit we are seeing from the credit card issuers as they retrench)
[Mar 30, 2009: Barron's - The Pleasure of Plastic: Mastercard (MA) and Visa (V)]
[Jan 16, 2009: Mastercard, Visa Weak as Democrats Look to Move Up New Regulations]
[Jul 30, 2008: Visa Rings Up Very Good Earnings - Should Bode Well for Mastercard]
[Jun 9, 2008: Mastercard, Visa see Gold in PrePaid]
[Feb 4, 2008: Visa IPO Seeks Mastercard Riches]

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