Visa Inc. (V) reported its earnings for the first quarter of fiscal year 2011 on February 2nd, beating the Zacks Consensus Estimate by a couple of cents per share, led by strong top line growth though partially offset by higher-than-expected operating expenses.
Meanwhile, investors’ reaction on the better-than-expected results also appeared quite optimistic on the Wall Street. This gets reflected by the consistent price hike witnessed since the earnings release.
The positivity is justified by the strong fundamental outlook that is also poised to sustain the effects of the outcome of the financial reform Act that is expected to be implemented by mid-2011. 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 modest enough to inject optimism into future. A quick look at the top-line reveals extensive growth across segments, including services, data processing and international transactions, although licensing fees showed some tepidity. Besides, payments volume, cross border volume and total processed transactions all increased by 15% year over year.
As a result, total operating revenues for the reported quarter were $2.24 billion, up 14.2% from $1.96 billion in the year-ago quarter and slightly higher than the Zacks Consensus Estimate of $2.23 billion. However, this significant growth was partially offset by higher-than-expected expenses that grew 17.4% year over year, during the reported quarter.
(Our full coverage on the earnings is available at: Visa Begins Fiscal ’11 with Zeal)
Earnings Estimate Revisions – Overview
Estimates have witnessed significant movements for Visa since the earnings release. This means that analysts view developments around the corner. 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 Estimate Revisions
Given the exceptionally strong fundamentals, analysts are excited about strong fundamentals, however, the financial reform Act signed in July 2010 have raised concerns over the sustainability factor. Nevertheless, implementation of the Act is not expected mid-2011.and Visa is exploring new avenues for growth.
Most analysts, therefore, have picked a positive approach towards the near-term growth of the company, while most are yet to assess the adverse impact of the reforms. As a result, over the last 7 days, 17 of the 28 analysts has raised their estimates for fiscal second quarter of 2011, while four downward revisions were witnessed. For fiscal 2011, 22 of 33 analysts raised their estimates with a couple of downward revisions having been observed over the last 7 days.
Magnitude of Estimate Revisions
Earnings estimates have shown modest movement since the earnings release. As a result, over the last 7 days, the second quarter of fiscal 2011 moved a couple upward to $1.19 while a humble movement was recorded in earnings estimate for fiscal 2011 that jumped a nickel at $4.83 per share. 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 and regulatory 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.
Moreover, given that the regulatory turmoil 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.
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. Also, regulatory measures for financial reform were enacted in the U.S. 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 stiffer for 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 value and payments transaction volumes through its systems.
Hence, we are maintaining a Zacks #3 Rank, which translates to a short-term Hold recommendation. Our long-term recommendation for the stock is also reiterated at “Neutral”.