- Revenues up 14%
- Net income up 16%
- Fully-diluted earnings per share up 20%
- Shares outstanding fall by 15.3 million due to an aggressive repurchase program
Last month, I identified two macro trends acting as a powerful wind in Visa’s sails: the rise of the emerging market consumer and the transition to a global cashless economy. We can see evidence of both trends in Visa’s operating results; while Visa’s 4th quarter payments volume was up a respectable 12% in the United States, volume was up 22% in the Asia Pacific region, 27% in Latin American and an almost unbelievable 34% in developing Eastern Europe, Africa, and the Middle East (see the chart below).
click to enlarge image
While global consumer spending was strong in 2010—particularly coming off of an exceptionally weak 2009—Visa’s growth in transactions was far in excess of overall consumer spending growth. This is consistent with the long-term trend of consumers shifting an ever-larger percentage of their purchases to plastic and away from cash and paper checks.
While this trend still has years to play out in the developed consumer markets of the United States and Canada, the real potential for future growth lies in emerging markets. 60% of its growth in revenues in the last quarter came from outside the United States.
Already, Visa gets 40% of its total revenues from overseas, most of which is from emerging markets. This number will only grow as incomes rise in these countries and, unfortunately, as new regulations potentially erode the company’s profitability in its home market. Visa has a stated goal of having more than half of its revenue from overseas by 2015.
Showdown in Washington
With Visa firing on all cylinders, the performance of the stock might be a little surprising to investors not familiar with the company. The reason that Visa’s stock is down 13% over the past year—even while the broader market has soared—is that a harsh new regulatory regime hangs over the company’s head like the sword of Damocles.
Following the passage of the Dodd-Frank Wall Street reform act, the Federal Reserve proposed caps on merchant fees that would effectively lower Visa and rival MasterCard’s (NYSE:MA) debit card fee revenue by 70%. The companies would also lose their current monopoly rights on their payment networks. While credit-card purchases and transactions from outside the United States would not be affected, the new rule—if implemented—would take a substantial bite out of Visa’s bottom line.
The key words here are “if implemented.” The Federal Reserve is currently hearing comments on its initial proposal, and the credit card companies—and their issuing banks—are intensely lobbying both the Federal Reserve and Congress to reconsider the cap, arguing that the beneficiaries of the move are large retailers and not the consumers that the law was intended to help. The House Financial Services Committee has scheduled a tentative hearing for February 17.
Until then, all Visa investors can do is wait.
Markets hate nothing more than uncertainty; often times, even bad news is met with a better reception than no news at all. The questions hanging over Visa have had the effect of depressing its stock price. Shares trade at a forward P/E of only 12; this for one of the premier growth stocks of the past several years.
Investors wanting to take a calculated gamble might find Visa’s shares attractive at these levels. If the Fed and Congress stand pat and keep the fee cap in place, the downside from here should be tolerably small, as it would appear that the damage is already priced in. But should the Fed and Congress reconsider the new rules, Visa’s shares could explode to the upside.
Limited downside and substantial upside; sounds like a good trade to me. I am reaffirming my “buy” rating on Visa.