In the earnings season, it was seen that most of the diversified financial services companies were declaring strong profits but the top line growth appeared to be restricted in most parts. Banks posted a profit of more than 30% with revenue growth of approximately 2%. Reserve releases and expense cuts were found to be the sources of earnings growth. However, global payments technology companies have been demonstrating appreciable revenue growth over the years. The companies are doing a decent job by expanding their businesses with key regional preferences and incorporating the new technological innovations in their businesses. The nature of the business allows these companies to operate at strong profit margins as they face distinct risk - return metrics which are specific to the industry. Within this sub-industry of global financial services industry, our focus for the day will be on Visa Inc. (V), the world's largest credit and debit card company. Visa has outperformed its peers in a number of aspects which will be discussed in detail in the subsequent sections.
Recent statistics suggest that the outlook for credit card companies appears to be positive with vast potential for growth. The expectations have soared as the credit card delinquency rates have decreased in the first quarter of FY13. An average of 2.06% was reported as the rate of delinquencies for 30 days or more which means a decrease of 0.4% as compared to the first quarter of FY12. Credit rating agencies like Fitch and Moody's have maintained their stable outlook as the decline in delinquencies rate has been convincing, specifically with respect to short term; however, in the long run there are some concerns which may cause undesirable volatility.
The improvement in expectations from the credit card companies is clearly reflected in their stock prices. The companies are witnessing an upswing and I expect the upswing to further its momentum in time.
The chart above presents a comparative illustration of stock prices of some major players in the credit card services industry over a period of one year. These players include Visa, MasterCard (MA), American Express (AXP) and Discover Financial Services (DFS). Firstly, the upward surge in the performance of these global payments companies is evident in the chart. Secondly, Visa has outperformed its competitors by projecting an increase of 55.87% over this period of one year.
Growth & Financial Performance
Visa has posted substantial improvements in its business in recent years. The company has posted a CAGR of 13.6% in terms of revenues since FY08. Similarly, the total assets of the company have grown with a CAGR of 7.42% since FY09. The company has done well in expanding its core business by exploring new arenas in order to pursue its growth strategy. The international market operations, specifically from emerging markets like Brazil, Mexico and sub-Saharan Africa, will serve as key growth drivers as the company aims to achieve 50% of its global revenue from international markets by FY15. The revenue growth in international markets was 16% for FY12.
Source: Visa Inc. Annual Statement FY12
The above chart shows the revenue growth of the company as compared to its competitors in recent years. The company has outgrown its peers in terms of revenues due to adaptation of innovative technological advancements. V.me is one of these exemplary products which serve as a digital wallet service and helps capture the growth in eCommerce. The company is strongly invested in the idea of adapting new technologies to accelerate growth.
In a holistic perspective, the financial services industry's performance has been slowing down as the regulatory pressures have started to take hold. The company has specifically stated the adverse effects of Dodd-Frank Act, as it is expected to reduce the volume of debit payments and hinder revenue growth. Furthermore, many analysts are looking forward to a moderate increase in delinquency rates which will also reduce the earnings of Visa. The credit card companies face a substantial threat of litigation costs as well. In spite of these threats, I find that with its robust financial position, Visa is in a position to sustain these risk factors.
The chart above shows the stock performance of the credit card companies in FY08. We can clearly see that during the high pressure period of the financial meltdown, the decrease in Visa's stock price was limited to approximately 15% whereas its competitors witnessed more drastic decline. In other words, the company operates at a beta of 0.79 which is well below that of its competitors.
The analysis makes a clear distinction between the financial performance of Visa and some other major companies in the industry. Despite being the largest player, the growth prospects of the company appear to be strong and the upward surge in the stock price is likely to continue with greater force. As the company introduces its investments in new technology and furthers its regional exploration, the stock will prove profitable for investors. On the account of these factors, a buy recommendation is proposed as the company not only projects a promising return but also limits its exposure to prevalent risks in the market.