Visa: Positioned For Growth

| About: Visa Inc. (V)

Since going public in the midst of the 2008-09 financial crisis, Visa Inc. (NYSE:V) has been a solid market performer.

Shares started trading on March 18, 2008 at about $60 a share. The stock jumped to $90 a share within two months, before falling with the rest of the market during the financial crisis to an all-time low of $41 in January 2009. But it's been almost entirely uphill since, with shares now trading around $170.

Visa shares have outpaced all of its competitors. Since its IPO, Visa stock is up about 184%. MasterCard (NYSE:MA) shares have climbed 172%, Discover Financial Services (NYSE:DFS) have increased 154%, while Capital One (NYSE:COF) (54%) and American Express (NYSE:AXP) (9.58%) have risen more moderately.

The Continued Shift From Cash to Plastic

These companies are benefiting from a global consumer shift from cash to plastic payments. Visa, which makes money by processing card transactions, reported fiscal first quarter net income of $1.3 billion for the three months ended on December 31, 2012, an increase of 26% over the prior year. This was equal to $1.93 per share, an increase of 30% over the prior year. Revenues for the quarter were up 12% over the year before. Annual revenues have grown steadily over the last few years, from $6.91 billion in fiscal 2009 to $10.42 billion in fiscal 2012.

Visa, which has a current market capitalization of $84.35 billion, processed 14.2 billion transactions during its first quarter, a 4% increase over the first quarter of 2011. A 21% increase in overseas transactions helped the company overcome a 4% decline in domestic transactions. Visa's payment volume increased across all geographies, growing 3% year-over-year in the U.S. to $544 billion, 13% in Asia-Pacific to $313 billion, and 37% in Central and Eastern Europe, Middle East, and Africa to $52 billion.

For 2013, Visa is projecting revenue growth in the low double digits, earnings per share growth in the high teens and free cash flow generation of $6 billion.

Visa is the largest card processor by dollar in the U.S. American cardholders carried about $330 billion in outstanding debt on Visa cards in 2011 after charging $930 billion in purchases. Prepaid and debit charges on Visa cards totaled $1.5 trillion in the same year.

Some may not fully understand the way Visa does business. The company does not actually issue credit cards or extend credit. It makes its revenues from fees charged to clients. According to Visa, 70% of its transactions in the United States are debit and prepaid, not credit. That's a positive sign for Visa, as prepaid cards are growing in popularity. Consumers loaded approximately $57 billion onto prepaid cards in 2011, and loads were projected to reach approximately $82 billion last year, $117 billion this year and $167 billion in 2014, according to the Mercator Advisory Group.

Business Buoyed by Technology

Technology is making it much easier to pay with credit and debit cards, which should contribute to the industry's growth. A study by Javelin Strategy & Research reveals that more than $20.7 billion in sales took place on mobile devices in 2011. Another report from IDC Financial Insights predicts that global purchase volume on mobile devices will exceed $1 trillion by 2017.

A number of products now on the market turn smartphones and iPads into credit card readers, allowing independent vendors to accept credit cards in remote locations. Digital wallets, which shorten the process of making online purchases, showed sizable growth in 2012.

Visa has positioned itself to take advantage of trends in how consumers use their credit and debit card accounts. It has taken an ownership stake in several mobile payment companies. Also, Visa has launched, which focuses on providing secure online transactions which does not force customers to reveal their entire credit card number. In addition to, Visa also offers Visa Paywave, which allows customers to simply waive their card without having to swipe.

To lure more merchants, Visa, along with MasterCard, now allows retailers to pass on transaction charges to customers.

A Robust Global Strategy

Visa also has a robust strategy to expand globally, mainly by working to reduce the use of cash in developing countries as card companies have done in the developed world. There is massive room for growth in this area, as 80% of transactions made worldwide are still in cash. Visa's initiatives include:

  • Launching a partnership with the Indian government, five banks in the country and the national identity system to offer debit cards in the world's second most populated country.
  • Partnering with one of the largest payment networks in Russia, QIWI, to provide a digital wallet.
  • Launching a new plug-and-play mobile money platform together with leading mobile phone operators in India and Rwanda.

Most of Visa's profitability and management effectiveness ratios outpace the competition. Its five-year average annual gross margin of 88.4% is nearly double the industry average of 44.5%, while its average net profit margin is roughly equal (7.2% to 7.1%). Visa's five-year average annual return on assets is 9.6%, compared with the industry average of 5.2%, while its return on investments (2.4%) trails the industry (7.4%). Total assets are more than three times greater than liabilities.

Visa's annual dividend of $1.32 currently yields 0.80%. It also announced a new $1.75 billion share repurchase program. During the quarter, Visa repurchased 9 million shares at an average price of about $145. With the remaining authorization of $1.1 billion, the repurchase program stands at $2.85 billion.

Perhaps the only blemish on Visa currently is the regulatory environment. In July of last year, MasterCard, Visa and other major banks agreed to pay more than $6 billion to resolve accusations that they engaged in anti-competitive practices and price fixing in payment processing. The Consumer Financial Protection Bureau has assessed fines on American Express, Discover and Capital One for misleading consumers, and has created a public database for credit card company complaints.

That hasn't stemmed enthusiasm for Visa. Despite the fact that it trades at a gaudy price-to-earnings ratio of 66.70, much higher than the industry average of 44.5, 18 analysts rate Visa a strong buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was written by an analyst at Catalyst Investments.