Sunday, February 9, 2014

Visa Maintains Growth Despite FX Headwinds And Tepid U.S. Volumes

Despite FX headwinds, Visa (NYSE:V) reported strong results for the first fiscal quarter of 2013 with a 9% increase in net income and an 11% growth in revenues. The total nominal payments volume growth rate fell from 9.6% in the September quarter to 8.2%. This can largely be attributed to currency fluctuations, as the U.S. dollar strengthened against currencies in Asia, Latin America and Canada, and the growth rates for these regions fell. In Asia, which accounts for more than 40% of volume outside the U.S., the nominal growth rate was 7.9%, despite a 13.8% increase on a constant dollar basis. Visa Europe is a wholly separate company to Visa Inc. and the latter did not benefit from the strengthening of the Euro during the quarter. Going forward, the company expects a negative impact of 2% on volume growth, and has issued an FX-adjusted guidance of 8% to 11% growth through the coming quarters.

The worrying sign for Visa was a 2% decline in the constant dollar growth rate, which was still healthy at 11.4% but lower than prior quarters. Despite a 3.8% increase in holiday season retail sales that allowed competitor American Express (NYSE:AXP) to maintain a 9% growth rate in card-member spending, Visa observed a 2% decline in its U.S. volume growth rate. The rate fell to from 10.3% during the September quarter to 8.3%. This might have been due to adverse weather conditions in the country, which led to a 15% decline in customer traffic through November and December.  Visa was not able to fully capitalize on the e-commerce phenomenon, which saw a 9.3% increase in total online sales through the December quarter. The company’s payment volume per transaction fell from $58 in the September quarter to $51 during the last quarter. Our price estimate of $191 for Visa’s stock implies a discount of 15% to the current market price.

U.S. Growth Rate Dependent On Consumer Sentiments
Electronic payment penetration in the U.S. is quite high; more than 60% of personal consumption expenditures (PCE) in the country are through non-cash transactions. This indicates that future growth won’t come from increased penetration but is dependent on consumer sentiments. Trends in this regards are positive. Recent figures released by the U.S. Department of Commerce show that Americans are now more inclined to spend; personal saving as a percentage of disposable personal income has gone down from 6.6% in the fourth quarter of 2012 to 4.9%.  Economic improvements in the country saw the unemployment level fall below 7% in December while wages and salaries increased 4% over the prior year.
Visa is the dominant card processing company in the U.S.; the company has a high level of merchant acceptance in the country, with over 88 acceptance locations per 1,000 urban households, and accounts for 22% of the personal consumption expenditures (PCE) in the country.   ((Personal Consumption Expenditures, U.S. Department of Commerce: Bureau of Economic Analysis)) We believe that Visa can maintain a stable growth rate of around 8% to 9% in the coming years in the U.S.

Expansion In Emerging Markets Will Lead To Higher Growth
The expansion of financial services in emerging markets in Asia and Latin America will allow Visa to achieve higher penetration in some key countries. More than 60% of transaction in countries like India, Mexico, Brazil, Russia, Indonesia, South Africa and UAE are still cash-based, but banks are rapidly expanding their network and issuing cards bearing the Visa logo. PCE growth rate has been around 10% in these countries for the last 4 years, underlining the potential. We believe that international expansion might be hindered by currency fluctuations in the short term, but long term prospects are good for Visa. During the December quarter, the company reported a 13.8% increase in Asia Pacific payments volume on a constant dollar basis but the nominal growth was 7.9%. In Latin America, the growth rate was 16% on a constant dollar basis but just 5.6% on a nominal basis.

Visa has around 700 million cards in Asia, almost the same number as in the U.S. However, the average number of transactions per card is just 5 per quarter as opposed to 17 for the U.S. Since the total population of the Asia-Pacific region is much higher than the U.S., we expect the number of cards to increase at a high rate in the coming years. Increase penetration and the growth of the e-commerce and m-commerce phenomenon will also lead to greater use of these cards in the region.

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