I thought I'd call your attention to some political doings that may positively affect Visa (V). Visa, as everyone well knows, is the maker of countless credit and debit cards.
Right now, there is a huge overhang on Visa: the Durbin Amendment. The Durbin Amendment was a restriction on debit card fees that came as a last minute addition to the mammoth Financial Regulation law passed last summer (better known as FinReg). However, recent political maneuvering threatens the amendment itself.
Let's start with how Visa makes money. A very simple company, Visa is essentially just a toll collector. Every time one of their cards are swiped, they get fees. That's it, that's most of their revenue. They don't lend money, unlike American Express (AXP), they just make the cards and run the system.
Now, on to their chart. As you can see, Visa was riding high, until the Durbin Amendment got added to the financial regulation bill at the end of last May. You'll see the corresponding drop below.
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The price dropped from nearly $100 to the low $70s, and 8 months later is still there, despite a gorgeous rise in the S&P500. Yep, the perennial Olympics sponsor has been left out of both rallies. See the other big drop, on December 16? It's more of the same; that's the day the Fed unveiled their implementation plan for said amendment.
Why is this Durbin Amendment so bad for Visa? There are 2 main portions to consider. This is basically direct from Dick Durbin's senate page, with self promotional wording in brackets.
The Durbin amendment directs the Fed to issue rules to ensure that debit interchange fees are reasonable and proportional to the processing costs incurred. These fees are far higher than the actual cost of processing debit transactions. [God forbid a company could charge more than cost, right?]
The Durbin amendment also allows sellers to offer discounts for customers to use competing card networks and for customers to pay by cash, check or debit card. The amendment would also allow sellers to choose to decline credit cards for small dollar purchases.
What does this all mean, then? It means the Fed is to set a limit on what Visa (or Mastercard (MA)) can charge for debit card use. Also, before Durbin, it was actually against Visa's rules to deny a small purchase. Yes, if your local merchant told you that you couldn't buy less than $10 on your card, you could have reported him to Visa. Finally, this law allows for merchants to charge more for using your debit or credit card (conveniently phrased as a “cash discount”) which was also against Visa's rules.
Ignore the parts about Visa's rules for now, those are a mere annoyance. The first part of the amendment is the danger, and has real potential to cut into revenue. Visa, who is the world's largest issuer of debit cards, makes lots of money off those debit swipe fees. According to Barron's, it's 20% of their $8 billion revenue. The Fed had 2 different proposals, but the one getting the most attention in December was to cap the swipe fee at $0.12, an estimated 75% reduction in debit card revenue. The final ruling is to be announced in the next few months.
Or will it be? Here's where things get interesting.
It's no secret that the newly elected Republicans have been after key areas of the FinReg laws. One of the most open targets is, you guessed it, The Durbin Amendment. Stuck in FinReg at the last minute, it has been assailed as unfair and stifling of privately owned intellectual property. It turns out that none other than Barney Frank, basically the ranking financial expert for Democrats in the House, is not too fond of it either. He was recently quoted about the Durbin Amendment thusly: “If they (Republicans) want to do something on it, I’ll work with them”.
Factor in the recent State of the Union speech by President Obama, where the overriding message was “Republicans, I am listening. Let's make the laws we passed last year better”, and it is clear that there is a new willingness to meet Republicans halfway, and support business. All of a sudden, it's looking like one dead or wounded Durbin Amendment to me.
Setting legislation aside for a moment, Visa has a service that is experiencing strong secular growth. More and more of the world uses charge and debit cards, and more frequently. It is more than a North American, European, or even Asian story, Visa has been very aggressive and even successful in a potentially huge growth area: Africa. The convenience of not carrying cash has the whole world going plastic.
Add in the fact that American consumers are spending again, almost to pre-recession levels, driving volume on card usage. International exchange fees also are a big part of Visa's revenue, and the world only gets more global each day. Their revenue has grown a whopping 55% since 2007. Sure, 17X forward earnings ain't cheap, but this is not a value play, this is a growth story. Historical trading puts a standard multiple at closer to 22X, so you could well be looking at a solid multiple expansion and price ranges in the mid $90 to $100. For those with a conscience, Visa is actually a socially responsible company, teaching personal fiscal skills and offering access to finance in many low income areas of the world.
The Durbin Amendment has rightfully been a big concern for Visa investors. However, as removal or curtailment is looking more and more likely, this could be a good chance to buy into a stellar growth company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
