By Renee O'Farrell
Visa (V) reported its first quarter performance late May 2. The world-renowned credit card company beat analyst estimates regarding its earnings by 6.7%, bringing in $1.60 a share on estimates of $1.50 a share - an increase of 27% compared to the same quarter last year. Visa also reported strong first quarter revenues. At $2.58 billion, the company was able to beat out analyst estimates of $2.48 billion and surpass its revenue from the same quarter last year by 11.2%. According to Reuters:
The company also raised the high-end of its estimated range for full-year earnings per share, despite uncertainty over questions from United States government anti-trust investigators on how it is adjusting to new federal limits on fees charged merchants for debit card transactions.
Visa disclosed on March 13 in a filing to the SEC that it had received a civil investigative demand from the Antitrust Division of the U.S. Department of Justice requesting "documents and information about its response to a new law and rules limiting debit card fees." Visa CEO Joseph Saunders said that the company is "confident [its] actions are appropriate." While that doesn't change the fact that Visa will (inevitably) lose some of its revenue as a result of new regulations, Saunders explained the increase in its forecast by saying "we have, obviously, very seriously considered various things that may or may not happen, and we have taken it into consideration in crafting our guidance" for full-year financial results.
Visa went from $122.19 at close on May 2 to fall to less than $116 a share on May 3. Given that analysts are expecting Visa to earn $6.02 a share this year and $7.04 next year, the company is priced at 16.48 times its forward earnings - a slight discount to its peers' average of 17.09. Hedge fund managers certainly seem to find the company appealing. Warren Buffett upped Berkshire Hathaway's stake in the company by 25% during the fourth quarter (check out Berkshire Hathaway's top picks). Chase Coleman's Tiger Global Management, Stephen Mandel's Lone Pine Capital and Jean-Marie Eveillard's First Eagle Investment Management also increased their already significant positions in Visa that quarter. I like Visa too. It is certainly priced right, as long as it stays under $120 a share. Anything over that and, in my opinion, it isn't worth the risk.
Rival Mastercard (MA) recently traded at $442 a share. Consensus estimates put the company's earnings at $22.09 a share this year, up from $18.70 last year, and expect them to rise to $26.05 a share next year, making for a forward price to earnings ratio of almost 17. Mastercard's success has hinged largely on its success in the Latin American, Asian Pacific and Middle Eastern markets and its recent acquisitions DataCash, an international processing system, and Access Prepaid Worldwide, a global prepaid card manager. I like Mastercard and it doesn't have the DoJ investigation looming. As long as the share price is under $450, I recommend it as a buy.
Visa Competitor American Express (AXP) is trading at roughly $60. Analysts say the company will earn $4.33 a share this year, rising to $4.79 a share in 2013, which puts its forward price to earnings ratio at 12.53. Things are looking pretty good at American Express. The company recently announced it was boosting its 72 cents annual dividend to 80 cents a share - an increase of over 11%. American Express uses a strategy in which it caters to customers with high disposable income - the ones that generally pay on time. These customers also expect a lot of perks, which really affects the company's bottom line, so it almost balances out, but given the company's low pricing and earnings growth estimates, I think American Express is a good pick.
Rival Discover (DFS) is trading at roughly $34 a share. The company's forward price to earnings ratio is just 8.88 times its future earnings but that is because its outlook is so poor. Consensus estimates put Discover's earnings per share on a declining trend, going from $4.06 a share last year, to $3.97 this year, then falling to $3.83 a share next year. Discover may have enjoyed some strong first quarter gains, beating analyst estimates on its earnings by 32.6%, coming in at $1.18 a share over expectations of 89 cents, but a company that consensus estimates put on a shrinking earnings trend is just not a stock I am willing to invest in.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.