Earnings Preview: Visa

Global electronic payment processor Visa Inc. (V) is scheduled to release its fiscal first quarter results after the market closes on February 2, 2011. The Zacks Consensus Estimate for the first quarter is $1.20 per share, representing growth of about 21.7% over the year-ago quarter.

Following the fourth quarter trends, improved pricing, increased number of processed transactions, higher cross border volumes and a lower share count along with reduced operating expenses are further expected to accelerate growth. However, increasing regulatory compliances, litigation charges and heightened interest costs continue to limit the desired upside.

Previous Quarter Performance

Visa’s fiscal fourth quarter 2010 (ended September 30, 2010) operating earnings of 95 cents per Class A common share were in line with the Zacks Consensus Estimate but came in substantially ahead of 74 cents reported in the year-ago quarter on lower share count.

Visa’s GAAP net income for the quarter came in at $774 million or $1.06 per share, dramatically increasing 50.6% from $514 million or 69 cents per share in the year-ago quarter. Besides, operating income substantially increased 28.1% year over year to $1.11 billion. Total GAAP operating expenses for the reported quarter decreased about 1% year over year to $1.0 billion.

Total operating revenues for the reported quarter were $2.12 billion, up 26.7% from $1.88 billion in the year-ago quarter and higher than the Zacks Consensus Estimate of $2.08 billion.

Segment-wise, service revenues increased 12.9% year over year to $912 million while data processing revenues rose 15.5% over the prior-year period to $840 million.

International transaction revenues, which are driven by cross-border payments volume, grew 22.1% over the prior-year quarter to $619 million. Other revenues were $167 million, marginally up 2.5% over the year-ago quarter.

On a constant dollar basis, payments volume increased 14% year over year to $828 billion. Total processed transactions carrying the Visa brand increased 16% year over year to 12.1 billion. Cross border volume, on a constant dollar basis, grew 16% year over year.

Agreement with Analysts

Ahead of the earnings release, we do not see much variation in analyst estimates over the past 30 days. A similar trend has been noticed over the past 7 days. Hence, the estimate revision trends and the magnitude of such revisions justify no major changes in the sentiment.

In the last 30 days, only 2 of the 27 analysts have revised their estimates upward for the fiscal first quarter of 2011, although three of the 26 analysts increased their estimates for fiscal 2011, overall providing no directional movement. This implies that the analysts have provided a neutral outlook and do not foresee any significant upward or downward pressure on the results.

However, the neutral approach towards Visa also gives scope for some positive surprises in the first half of 2011, particularly, on achieving better clarity on the potential effects of the ongoing regulations, primarily which requires reduction of interchange fee paid on debit transactions. Moreover, the company is focused on keeping its balance sheet at low risk while also generating strong cash flows, a positive that could increase operational efficiencies by deploying capital through share repurchases and dividend payments.

Magnitude of Estimate Revisions

In the last 90 days, there have not been any significant revisions in the earnings estimate following the fiscal fourth quarter results. However, earnings per share increased by a penny to the current level of $1.20 and $4.79 for fiscal first quarter and fiscal 2011, respectively. However, estimated earnings per share dropped by 6 cents to the current $5.60 for fiscal 2012. This trend reveals a cautious outlook in the analysts’ opinion given the lack of clarity once the regulation will be in full implementation by the next fiscal.

Surprise

Going by past trends, we have a slightly mixed opinion about Visa exceeding estimates, given the uncertain regulatory environment hanging around Visa. The company’s reported earnings per share exceeded its expectations for all of the last four quarters and has a positive four-quarter average surprise of 4.91%.

Our Take

The Dodd-Frank Act that was enacted in July this year has finally axed the card companies by slashing the interchange fees on debit card transactions. Particularly, card giants, Visa and MasterCard Inc. (MA) are reported to be the wary victims of the interchange fee cuts, since being one of the key revenue drivers, this regulation is expected to adversely impact future revenue of the card companies.

During December, the Federal Reserve recommended that the interchange fee on debit transactions, charged by banks on the merchants, should be restricted to about 7–12 cents, against the current average debit card interchange fee of 44 cents or 1.14% of the purchase price. On the other hand, to make matters worse for the card giants, merchants will now have the choice of processing transactions through unrelated networks. A final decision is, however, not expected before April 2011.

These increasing regulatory compliances, competitive pressure, litigation charges and heightened interest costs continue to raise ample caution in the near-term since the adverse financial impact of the recent financial reform remains to be assessed.

However, Visa remains quite strong fundamentally. Moreover, restrictions have further opened up diversification opportunities in the prepaid and eCommerce spheres. While increased free cash flow outlook in 2011 paves way for ample growth opportunities, stock buybacks and dividend increment further enhance investors’ confidence. Overall, we believe continued synergies from effective marketing efforts and cost-cutting initiatives along with a healthy market recovery to help drive earnings growth in the long run.

Hence, we currently provide Neutral recommendation on Visa, given the equal measure of caution in the intermediate term. This also corresponds to the Zacks #3 Rank (short-term: Hold).

VISA INC-A (V): Free Stock Analysis Report

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