Why Visa Is Heading To $220

Apr.28.14 | About: Visa Inc. (V)

Summary

Note, during the reported quarter, Visa repurchased about 5.1 million class A common shares for a total cost of $1.1 billion.

I don't expect anything to impact management's prior share repurchase authorizations worth $5.0 billion.

At $198, value to reach $220 within the next 12 to 18 months on the basis of the company's buyback program and a resolution in Russia.

Investors were high on Visa (NYSE:V) ahead of the company's fiscal second-quarter report. But management spooked the Street with weak earnings and disappointing guidance. More than anything, this was what sent the Dow Jones Industrial Average (Private:DJI) tumbling down last week, given that Visa is the Dow's largest component.

Visa's stock plummeted more than 5%, despite the credit-card company reporting $2.20 cents per share, which beat analysts' estimates by 2 cents. On a year-over-year basis, Visa's earnings jumped close to 15%, topping last year's mark of $1.92 per share. It seems investors wanted more. But given the pace of the U.S. economic recovery, I don't see what Visa could have done better.

Revenue, meanwhile, advanced to $3.16 billion. Although it fell shy of Street estimates of $3.19 billion, this too represented 11% year-over-year growth. The concern is with the June quarter, of which management warned that revenue would be adversely impacted due to sanctions imposed on Russia and a stronger dollar. Byron Pollitt, Visa's CFO offered more color on the situation, saying:

"We have 100 million cards [in Russia] and it is not in anyone's best interest, inclusive of the Russians, to make those cards not available to their own citizens."

Pollitt also reminded investors that the lowered guidance assumed "several pennies of earnings per share impact" from the sanctions in Russia. This is because during the quarter, Visa ended relationships with two Russian banks. Because of this, management has had to absorb impact from a lessening in cross-border money flows. But is that enough to spark this decline?

From my vantage point, this is an external factor - albeit an important one. I was equally impressed by the rate of Visa's recovery with respect to all of the metrics and higher operating margin guidance. I don't think the Russia situation, which will likely also impact rival MasterCard (NYSE:MA), alters Visa's long-term story.

Prior to this quarter and the situation in Russia, Visa's revenue has improved in each of the last three quarters, including a 7% revenue increase in the January quarter, which brought the figure up to $3.16 billion. Looking back further, revenue increased 9% in the fourth quarter from the year earlier and 17% in the third quarter. So clearly, this global payments company, which connects consumers, businesses, banks and governments around the world, doesn't have an issue with growth.

On a segmental basis, it was encouraging that the company was still able to post 7% year-over-year growth in service revenue, which reached $1.46 billion. Note, these are recognized based on payment volumes in the prior quarter. All other revenue categories, however, are recognized based on the current quarter activity, including Data processing, which posted revenues of $1.23 billion, up 7.3% year-over-year.

Likewise, International transaction revenues, which are driven by cross-border payment volumes, rose 5% over the prior year to $871 million. Management also reported "other revenue" of $183 million, up roughly 5%. These are mostly attributable to Visa Europe's licensing fees. Visa also reported a 12% jump in payment volumes, which exceeded $1 trillion, while total processed transactions carrying the VisaNet brand increased 11% year-over-year to 15.4 billion.

From my vantage point, this is still a strong operation, the situation with Russia notwithstanding. I don't want to trivialize the issue, but the extent to which it disrupts Visa's global presence has been exaggerated. Nor do I believe this will have any serious lasting impact on Visa's ability to maintain high profits and excellent cash flows. As it stands, I still like Visa, especially with this recent decline.

Note, during the reported quarter, Visa repurchased about 5.1 million class A common shares for a total cost of $1.1 billion. And I don't expect anything to impact management's prior share repurchase authorizations worth $5.0 billion. With the stock trading at $198, I project fair value to reach $220 within the next 12 to 18 months on the basis of the company's buyback program and an assumed settlement with the situation in Russia.

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

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.