Visa's Tech Integration, Expanding Global Footprint, Confirm Buy Rating

| About: Visa Inc. (V)

Visa Inc. (V), a leading global payments technology player, reported a stronger-than-expected performance for its third quarter of the current year on July 25, despite a weak global economic environment. The following table shows how both earnings and revenues exceeded consensus analyst estimates.

Visa, in the midst of weak U.S. retail sales data, low consumer sentiments and rising unemployment, surprised markets by posting both revenues and earnings that were above estimates. On revenues of $2.57b, the company was able to generate earnings of $1.56 per share. Earnings exceeded estimates by a significant 7.6%, while revenues were above by 2%. The better-than-expected results were primarily associated with solid growth in cross border transactions, global payments volume and non-U.S. processed transactions. Going forward, the company remains focused on introducing innovative payment solutions for both merchants and consumers.

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The top line of $2.57b is largely flat when compared to the prior quarter, however, it is 11% above that of the prior year. The otherwise healthy looking company posted a net loss of $1.84b for its third quarter. The results were dampened due to the creation of a litigation provision of $4.1b for the settlement agreement in the multi-district litigation case. The company's quarterly adjusted net income stands at $1.1b, or $1.56 per diluted share.

Revenues from Services, which are recognized based on payments volume of the prior quarter, advanced by 15% to $1.22b when compared to the prior year. On a constant dollar basis, payments volume growth for the quarter ended March 31, 2012, remained at 11% when compared to the prior year. Third quarter's payments volume growth, on a constant dollar basis, was at 6%. This current payments volume growth will affect next quarter's Service Revenues.

Revenues from Data Processing demonstrated the most significant improvement, when compared to both the prior quarter and the prior year. Data Processing revenues of $1.04b remained 13% and 20% above those of the prior quarter and the prior year, respectively. The improvement was due to solid growth for CyberSource transactions.

Similarly, International Transaction revenues, backed by cross border activity, advanced by 14% YoY, and 3% QoQ. Cross border activity, on a constant dollar basis for the three months ended June 30, 2012, advanced by 14% over the prior quarter. A further region-wise breakdown reveals that much of this growth came from CEMA and Latin America, which grew by 41% and 20%, followed by a 13% growth in the Asian-Pacific region. Russia represents a major opportunity for the company, where around 80% of payments are still made in cash. Other revenues accruing as a result of the Visa Europe licensing fee also increased by 5% YoY.

The company generated cash flows from operations of $3.6b, showing a 20% growth YoY. The company has no debt in capital structure, which adds to its balance sheet strength. Besides, the company has plans to initiate a share repurchase program, where it would purchase shares worth $1b.

Visa's stock is trading at a significant discount of 54% with regards to its P/B multiple when compared to its major rival, MasterCard (MA).

Future Outlook

Tech integration:

Going forward, we believe the company has the required resolve and potential to reshape the Payments Industry. It recently showcased what could be the future of global payments, at the London Olympics. In collaboration with Korean-based Samsung, the company has made possible payments via mobile, payments through chip-enabled cards and payments through contactless credit/debit cards. These initiatives, besides contributing in the revenues of the coming quarters, will further the company's aim to generate more than half its revenues from outside the U.S.

Penetrating New Markets:

The company is also working to introduce Shariat compliant credit and debit products to capture the Middle Eastern markets. It secured a product extension with Kuwait's National Bank and opened its regional head office in Nairobi, Kenya. The company is also striving to build new relationships with the Bank of Communications, and extend relations with the CITIC Bank and the China Minsheng Banking Corporation.

Around 30% of global consumer spending, which amounts to $10 trillion, still remains through cash and checks. The room to penetrate this cash and checks market has actually risen over time, creating more opportunity for the company.

American Express (AXP) recently disclosed its performance for the quarter ended June 30, 2012. Although the results slightly missed consensus analyst estimates, they demonstrated a slight improvement over the prior year.

In conclusion, despite the aforementioned weak economic situation that is prevailing in the U.S., Visa surprised analysts with growth in payments volume. Potential headwinds for the company include the spillover of the European debt crisis to other regions. In our previous report we were bullish on Visa. The company's recent performance and its resolve to ride the secular shift in the payments market, combined with efforts to expand its global footprint, support our stance, which is why we reaffirm our buy rating for the stock.

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