At Helix Investment Management, we focus on companies with clear secular catalysts. That leads us into investments such as EMC, Costco (COST), and Qualcomm (QCOM). And we are always on the lookout for new opportunities. One such opportunity that we would like to highlight is Visa (V).
Visa is the world's largest payment network, with a worldwide marketshare of 64.7% in 2011. The company competes with MasterCard (MA), American Express (AXP), and Discover (DFS). And although shares may be trading close to all-time highs, we believe that there is still ample upside to be had in shares of Visa, and we delve into our bullish thesis below, which focuses on 3 aspects: the company's finances, its market position, and growth strategies.
Financials: Unmatched Performance
Visa's business model is superb, with the company bearing no credit risk from its customers, and simply having to process transactions. The benefits of this model become clear when investor's examine Visa's financials. In regards to financial performance, Visa is the clear leader in this space, besting MasterCard, Discover, and American Express (although, to be fair, the performance of Discover and American Express cannot be directly compared to Visa, as those 2 companies also extend credit). We break down Visa's financial performance for fiscal 2011 as a whole, as well as its most recent quarter (Q2 2012), and that of its competitors (for the record, MRQ means most recent quarter, and LFY means last fiscal year).
|MRQ Revenue||$2.578 Billion||$1.758 Billion|
|MRQ Operating Margin||62.296%||56.883%|
|MRQ Profit Margin||50.116%||38.794%|
|LFY Revenue||$9.188 Billion||$6.714 billion|
|LFY Operating Margin||59.381%||40.408%|
|LFY Profit Margin||39.726%||28.388%|
|Net Cash||$3.738 Billion||$5.141 Billion|
|Forward P/E (Reuters Estimates)||19.57x||19.3x|
Visa has enviable financials. Few companies can post annual profit margins that approach 40%, and the company's results are a testament to the strength and resilience of its business model. Visa offered optimistic commentary on its latest earnings call, and we believe that the company's financial position will only strengthen in the quarters to come.
Given Visa's profit margins, which stem from a business model that is light on capital expenditures, Visa has built up nearly $4 billion in cash on the balance sheet (with no debt), questions arise as to what Visa will do with that excess cash. And that question was asked on the company's earnings call. CFO Byron Pollitt responded to that question by stating that "we [Visa] are a committed management team to returning excess cash to shareholders. I think if you take a -- and so -- and we remain committed to that. If you would take a step back, we had a very large, in our view, very large share repurchase in the first quarter. And so we time our purchases over the course of the year, looking for both opportunities to do that at attractive pricing but also, in the case of the first quarter, being responsive to an opportunity to put a significant increment of cash into the escrow account. So I think if you take a step back year-to-date, we're all -- we've already made sizable repurchases, and you can count on us to continue to return excess cash not just for this year but years to come." Visa is committed to returning cash to shareholders, and in February launched a new $500 million buyback program. Visa has also slowly but surely raising its dividend, with the payout now coming in at 22 cents per share each quarter. Given the company's trajectory, the dividend will likely be raised sometime this year.
Client Retention and Regulatory Matters: Positives on Both Fronts
Perhaps the 2 most important things for Visa are client retention and developments on the regulatory front, specifically in the United States. The company has seen positive developments on both fronts, which have strengthened its market position.
During its earnings call, Visa announced that it has singed 9 of the top 10 credit card issuers in the United States to multi-year contracts through fiscal 2015 and beyond. In aggregate, those contracts represent over 75% of Visa's credit volume, which gives the company increased revenue certainty for several years, at a minimum. Furthermore, the company announced a partnership with Alaska Airline (ALK), and noted that those customers are affluent, with a high cross-border usage. And now that the merger of Continental and United (UAL) is complete, the combined company has chosen Visa as its mileage card partner.
Visa is seeing positive developments in the debit space as well. The company has singed 14 of the top 15 debit card issuers in the United States to agreements that go to at least fiscal 2015, with many more extending beyond that date. The regulatory environment is dynamic on the debit side of things, but Visa's management is confident that the company can weather the changes with minimal adverse impact to business. Visa's debit volume growth slowed to just 2% in this latest quarter. On the debit side, this was due to issuers reducing marketing on debit rewards programs, thus offering less incentives for customers to use them. Interlink volumes bore the majority of the regulatory impacts. Visa's guidance, for both the remainder of fiscal 2012 and fiscal 2013, however, accounts for all of the regulatory dynamics on the debit side of Visa's business.
On April 1, Visa implemented its new pricing strategy, in which it charges merchants a fixed fee, depending on size, and reduced per-transaction fees. On March 13, however, the Justice Department announced that it is looking into Visa's new debit strategies ahead of its April 1 launch. Visa has stated that it is fully cooperating with the government, and that it has fully resolved 4 such investigations since 2007, and that U.S. pin-based debit transactions accounted for 2% of total revenue. Even if the Justice Department takes action, the impact to Visa should be manageable. We turn now to growth, which forms the core of our bullish stance on shares of Visa.
International: A Secular Growth Story
It is important to remember that Visa benefits from 2 long-term trends in emerging markets: the growth of consumer spending AND the shift in how they spend. Simply put, Visa benefits as global economies grow. And even if overall consumer spending were to decline in emerging markets due to macroeconomic issues, what matters more is that a larger proportion of that spending occurs via non-cash means.
Visa is steadily growing its international business, and the benefits are showing. International accounted for 64% of Visa's revenue growth, and now makes up 47% of total revenue. In Brazil, a key growth driver, Visa has won over one of the country's largest banks from its competitor (likely MasterCard), and half of its debit portfolio will be Visa-branded in a few years. Furthermore, Visa has singed agreements with most major Brazilian banks to dramatically increase the amount of transactions routed through VisaNet. Today, 63% of transactions are routed through VisaNet. With these agreements, 90% of all Brazilian Visa transactions will be routed through VisaNet within the next several quarters.
Visa is also making progress in the Asia-Pacific region, with payments growth coming in at 16% this quarter. Visa is tailoring growth strategies to each market in the region, due to the dynamics of local economies, and has signed several deals to expand debit and credit usage in the region.
The Future of Payments, With Visa at the Center
In the past few years, concerns over Visa's future in the payments space have intensified, as many new companies emerge to make a name for themselves in the market. While we think that many of them have something to offer, we are certain that there is a place for Visa in the future of payments.
Visa has either bought or invested in several payment startups, including CyberSource, Playspan, and Fundamo, and those investments are paying off. Vodafone (VOD) has partnered with Visa to offer mobile payment solutions to its subscribers, and Visa's offerings will be available to 390 million subscribers in 30 countries. Orange has also partnered with Visa to offer prepaid payment services to its customers across Africa and the Middle East.
Visa is working to cement itself in the NFC space as well. The company is one of Isis' partners, and has licensed its payWave technology to Google (GOOG). Intel (INTC) has announced that it will be using Visa's technology as the standard in its upcoming mobile devices. And Nokia's (NOK) Lumia line of Windows Phone devices has been certified to support payWave technology. We fully believe that Visa will be a leading player in the future of payments, and the company's recent initiatives are proof of the company's determination to achieve this.
Visa is benefiting from many trends. The company is in great financial shape, is set to increase its returns of capital to shareholders, and is set to boost revenue and earnings from both its international operations, as well as its investments in the future of payments. We believe that Visa has a clear set of secular tailwinds that allow the company to weather a great deal of economic uncertainty, both here in the United States and internationally. Investors should take advantage of Visa's recent dip from all-time highs (a sign of strength, not overvaluation) and add to or initiate positions in Visa.
Additional disclosure: We are long GOOG, MA, and DFS via a mutual fund that assigns the companies a weighting of 2.1%, 0.81%, and 1.73%, respectively. We are looking at initiating a position in V in the next several trading days.