Strong Earnings Expected From Visa, But Risks Abound

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 |  About: Visa Inc. (V), Includes: FAS, FAZ, IYG, XLF
by: Leigh Drogen

Visa Inc. (NYSE:V) is set to report FQ2 2014 earnings after the market closes on Thursday, April 24th. Visa is an American multinational financial services company known for its branded credit and debit cards. Earlier this month Visa lost its status as the world's most popular debit card to China UnionPay, nevertheless Visa continues to grow in both EPS and revenue as the world increasingly shops with plastic. This quarter Wall Street is expecting a 14% increase in EPS and an 8% gain in revenue compared to FQ2 of last quarter. Here's what investors are expecting from Visa on Thursday.

The information below is derived from data submitted to the Estimize.com platform by a set of Buy Side and Independent analyst contributors.

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(Click Here to see Estimates and Interactive Features for Visa)

The current Wall Street consensus expectation is for Visa to report $2.19 EPS and $3.196B revenue, while the current Estimize.com consensus from 36 Buy Side and Independent contributing analysts is $2.21 EPS and $3.209B in revenue. This quarter the buy-side as represented by the Estimize.com community is expecting Visa to beat the Wall Street consensus on the top and bottom line by a small margin.

Over the previous 6 quarters, the consensus from Estimize.com has been more accurate than Wall Street in forecasting Visa's EPS and revenue 5 times each. By tapping into a wider range of contributors including hedge-fund analysts, asset managers, independent research shops, students, and non-professional investors Estimize has created a data set that is more accurate than Wall Street up to 69.5% of the time, but more importantly, it does a better job of representing the market's actual expectations. It has been confirmed by Deutsche Bank Quant. Research and an independent academic study from Rice University that stock prices tend to react with a more strongly associated degree to the expectation benchmark from Estimize than from the Wall Street consensus.

The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case, we are seeing a very small difference between the two groups' expectations.

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The distribution of estimates published by analysts on the Estimize.com platform range from $2.13 to $2.27 EPS and from $3.172B to $3.320B in revenues. This quarter we're seeing an average sized distribution of estimates on Visa.

The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A wider distribution of estimates signaling less agreement in the market, which could mean greater volatility post earnings. Click to enlarge

Over the past 4 months, the Wall Street EPS forecast fell from $2.21 to $2.19, while the Estimize consensus declined from $2.29 to $2.21. Meanwhile, the Wall Street revenue consensus dipped from $3.240B to $3.196B while the Estimize consensus came down from $3.276B to $3.209B. Timeliness is correlated with accuracy and downward estimate revisions going into an earnings report are often a bearish indicator.

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The analyst with the highest estimate confidence rating this quarter is WallStreetBean, who projects $2.20 EPS and $3.204B in revenue. WallStreetBean is ranked 10th overall among 4,200 contributing analysts. Over the past 2 years, WallStreetBean has been more accurate than Wall Street in forecasting EPS and revenue 50% and 46% of the time respectively throughout 1204 estimates. Estimate confidence ratings are calculated through algorithms developed by deep quantitative research, which looks at correlations between analyst track records and tendencies as they relate to future accuracy. In this case, WallStreetBean is expecting Visa to beat Wall Street's expectations but fail to live up to the Estimize consensus.

The world continues use credit cards more and more and Visa is one of very few companies that stand to gain from it. In recent years, Visa has benefited from new technologies like Square, which make it much easier for small and mobile vendors to accept credit card payments using their smartphone. But mobile and electronic payments is a hotbed of innovation right now and new competition has its sights set on Visa's high transaction fees. It's widely rumored that even Facebook (NASDAQ:FB) is preparing to roll out its own electronic payment network. And the very existence of bitcoin, which has been quiet lately, poses a long-term threat to the viability of the credit card companies. Corporations are also getting fed up with paying high fees to Visa, Wal-Mart (NYSE:WMT) is suing Visa for $5 billion for charging excessive fees. But for now Visa continues to grow at an outstanding pace and the Estimize community expects Visa to beat the Street's expectations by 2c per share on EPS and $13 million in revenue.

Disclosure: None