Why I Am Bullish On Visa Ahead Of The Earnings

| About: Visa Inc. (V)

Summary

Strong results from JPMorgan credit card is a positive for Visa.

U.S. credit card debt is on track to reach 2008 level driven by banks' promotion and improving credit.

EC approval on Visa Europe is a positive, and I will be looking for additional commentaries on guidance and Visa Checkout.

Visa (NYSE:V) is scheduled to report its third-quarter earnings on Thursday.

Recall that last quarter, Visa reported in-line revenue and a small beat on earnings, but management modestly lowered its revenue guidance due to international transaction fees, higher rebates and tougher international comparison. To address the revenue challenge, management is focusing on controlling its cost so that the underlying earnings remain stable.

Overall, I think management's decision to offset slower revenue with lower cost is a reasonable one, because Visa continues to gain market share with new contracts and improving visibility from Visa Europe after months of planning and integration. I feel the near-term headwinds could last for two quarters, but also highlight that any weakness in the U.S. dollar as well as a new domestic partnership should be positive for the revenue. Finally, I believe higher rebates and incentives should begin to moderate after new contract launches with Costco (NASDAQ:COST) and USAA are up and running.

Two key indicators that give me confidence on Visa's upcoming quarter are solid volume from JPMorgan (NYSE:JPM) and higher credit card balance.

In JPMorgan's most recent earnings, the bank saw credit volume increase by 8.2% compared with 7.9% in Q1, and this is a positive for Visa because JPMorgan is one of the largest credit card issuers in the U.S. Overall, the combined card volume was up 8.8% in Q2, which was another improvement compared with 8.6% in Q1. I believe JPMorgan's credit card volume is a good read-through for Visa, because the bank carries mainly Visa credit cards (around a dozen different Visa cards per JPMorgan site) and only one MasterCard (NYSE:MA). It does not disclose the specific number on fees generated from Visa cards, but I believe it is safe to say Visa accounts for the vast majority of JPMorgan's credit card volume.

Another good indicator is that the U.S. credit card balance is on track to reach $1 trillion this year, thanks to banks pushing credit cards and as consumers become more comfortable taking on credit. The $1 trillion mark is significant because it will be close to the all-time peak of $1.02 trillion before the financial crisis. This should not be a surprise, due to the increasing confidence of the U.S. consumers and the steady growth in consumer spending, the job market and improving credit quality. Under the low rate environment, cards have become the most profitable segment for banks due to the low delinquent rate, so they have been increasing the credit limits for consumers and pushing out new card products, which benefits Visa. When the interest rate rises, these cards could turn out to be highly profitable for the banks, so we can consider them to be an attractive optionality.

Besides the positive read-throughs, I will also be looking for management commentaries on 2017. Visa Europe, USAA, and Costco are all positive drivers for 2017 revenue estimates, and their costs are already being recognized for these segments, so we are just waiting to get the revenue benefit starting next year. After the EC approved Visa Europe, it will again be interesting to see what guidance Visa's management can provide us. Finally, I will also be looking for commentaries on Visa Checkout that grew to 12 million users. The recent announcement by Wal-Mart (NYSE:WMT) to adopt Visa checkout, and that Bank of America (NYSE:BAC) will be auto-enrolling customers are both positive reads for Visa.

Visa's stock price has been down 2% over the past three months compared with a 3% increase for the Dow Jones Industrial Average, so it has been underperforming the index, and I see this to be a sign that the market may not be fully pricing in better-than-expected earnings. Also, there are talks of a potential Visa and PayPal (NASDAQ:PYPL) partnership, in which PayPal may use Visa's token standard or Visa supporting tokens in PayPal wallet. No details are given, but any of these potential events could be a catalyst for Visa on its earnings day given that PayPal has done very well amassing its user base of around 184 million users.

In conclusion, I would be a buyer of Visa ahead of the earnings call.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.