Earnings Scorecard: Visa (V)

Visa Inc. (V) reported its earnings for the third quarter of fiscal year 2010 on July 29th, beating the Zacks Consensus Estimate by 4 cents per share, led by strong top-line growth though partially offset by higher-than-expected operating expenses. However, investors’ reaction on the better-than-expected results were somewhat mixed on the Wall Street. This gets reflected in slight price volatility witnessed since the earnings release. The precariousness could be justified by the uncertain outcome of the financial reform Act that came into effect recently in July 2010. Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for the short-term and long-term outlook for the stock.

Earnings Report Review

It is always encouraging to outperform estimates, particularly when the difference is substantial enough to inject optimism into the future. A quick look at the top-line reveals extensive growth across segments, including services, data processing, international transactions and licensing fees. Besides, both payments volume and total processed transactions increased by 14% year over year while cross border volume grew 17% year over year.

As a result, total operating revenues for the reported quarter were $2.03 billion, up 23.3% from the year-ago quarter. However, this significant growth was partially offset by higher-than-expected expenses that grew 8% year over year, during the reported quarter.

(Our full coverage on the earnings is available at: Visa Beats on Strong Top Line)

Earnings Estimate Revisions – Overview

Estimates have witnessed marginal or no movement for Visa since the earnings release. This means that analysts remain on the fence currently. This is not a very bad news. In fact, this gives quite a valid reason to own a stock that benefits from positive results and provides a scope for rise in the future. The earnings estimate details are deeply delved into below.

Agreement of Analysts

Given the exceptionally strong fundamentals, analysts are excited about strong fundamentals, however, the recent financial reform Act signed by the U.S. President in July 2010 have raised concerns over the sustainability factor. Analysts, therefore, have picked a wait and watch approach. As a result, over the last 7 days, after the earnings release, none of the analysts have revised their estimates.

Magnitude of Estimate Revisions

Earnings estimates have shown zero movement since the earnings release. As a result, over the last 7 days, the fourth quarter of fiscal 2010 remained intact at 94 cents while earnings estimate for fiscal 2010 remained unchanged at $3.90 per share. Even the estimate for fiscal 2011 remains unaltered at $4.73, after rising a penny in the last 30 days. This overall looks satisfactory, particularly, when so many other stocks are experiencing a downfall, analysts continue to value Visa’s earnings at a considerable premium.

Visa in Neutral Lane

Visa is the global leader in the retail electronic payment network and remains well positioned to grow its revenue and earnings despite the economic hangover. The company continues to drive growth through increased payment volumes along with consistent growth in processed transactions. Visa benefits from strong secular demand growth, meaningful international exposure, high barriers to entry, excellent pricing power and impressive operating leverage.

Further, the recent CyberSource acquisition is expected to increase clientele and provide fast and efficient connectivity to multiple payment networks, driving long-term growth. Also, the above-average earnings growth, strong competitive position and leverage to an eventual economic recovery will result in a relative valuation premium.

However, we are concerned about Visa’s resilience and ability to raise prices and reduce expenses amid the regulatory compliances. Besides, regulatory measures enacted in the U.S. in 2009 have taken effect after the U.S. financial reform bill was passed in July 2010. Accordingly, new restrictions have been deployed on the fees card networks that charge merchants on their transactions. This would not only contract credit offerings from financial institutions but also compel the company to trim its debit/credit processing fees.

The new regulation is expected to be more severe on Visa than its peers such as MasterCard Inc. (MA) since the former is more exposed to the debit processing market. The regulations also impose numerous costly new compliance burdens on the company. Concurrently, a part of these costs are shifted to the consumers, which impacts consumer spending and results in the risk of declining transaction and payments volumes through its systems.

Hence, we maintain a Zacks #3 Rank, which translates to a short-term Hold recommendation. Our long-term recommendation for the stock is also reiterated at Neutral.

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

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