Global payments technology company Visa (V) showed us why we continue to like the company when it reported fiscal first-quarter results January 30. The firm is not a bank and does not issue cards, extend credit, or set rates/fees for account holders of Visa-branded cards, but it does operate one of the most advanced processing networks, and we can think of few other business models that generate a stronger competitive advantage. Visa takes on no credit risk -- unlike American Express (AXP) and Discover Financial (DFS) -- but remains an integral part of the secular trend toward a cashless society and online consumption, where most transactions are not made with cash. Visa is the largest retail electronic payments network in the world based on payments volume, total volume and number of transactions, representing an enviable position to peers.
Image Source: Visa
During its fiscal first quarter 2014, revenue expanded 11% thanks to strong growth in service revenues, data processing revenues and international transaction revenues, leading to a 9% and 14% increase in net income and earnings per share, respectively. Payments volume, on a constant dollar basis, for the three months ended December 31, 2013, jumped 11% versus the prior year, to $1.2 trillion. Total processed transactions by Visa for the three months ended December 31, 2013 jumped 13% from the same period a year ago. The company ended the year with $7 billion in cash and cash equivalents.
Looking ahead, Visa issued the following outlook for fiscal 2014:
- Annual net revenue growth: Low double-digits on a constant dollar basis, with an expectation of two percentage points of negative foreign currency impact;
- Client incentives as a percent of gross revenues: 16.5% to 17.5% range;
- Annual operating margin: Low 60s;
- Annual diluted class A common stock earnings per share growth: Mid to high teens; and
- Annual free cash flow: About $5 billion.
Visa's business model is highly profitable (operating margins are in the low 60s), throws off lots of cash, and is insulated from new entrants due to an impenetrable network effect proliferated by users and merchants alike. Though shares are starting to get a bit pricey, we view the position as a core holding in the Best Ideas portfolio to capture the secular trend toward a cashless society. We don't expect to make any changes to the weighting in the portfolio as a result of the recent performance. The company is our favorite fundamental idea in the 'Financial Tech Services' industry.
Additional disclosure: V is included in the portfolio of our Best Ideas Newsletter.