Visa - Least Preferred Payment Provider

| About: Visa Inc. (V)

Shares of Visa (V) rose almost 4% in Thursday's trading session. The global payment and technology company reported a decent set of fourth quarter results. Both Visa and competitor MasterCard (MA) are benefiting from an increased adoption of card payments by consumers across the globe.

Fourth Quarter Results

Visa reported third quarter revenues of $2.73 billion, up 14.6% on the year. The effects of a strong dollar shaved off 1% of total revenues.

Visa reported operating income of $1.52 billion, up 11.7% on the year. Net income rose 88.9% to $1.66 billion, or $2.48 per diluted share. The company reported a special benefit of $627 million related to its tax reserves. Adjusted net income came in at $1.0 billion, or $1.54 per diluted share. On average, analysts expected Visa to report adjusted earnings of $1.50 per share.

For the full year of its fiscal 2012, Visa generated revenues of $10.4 billion. The company net earned $2.1 billion, or $3.17 per diluted share. During the year, Visa took a $4.1 billion litigation provision related to a settlement with US merchants. The settlement marked the end of a seven-year battle over credit-card "swipe" fees.

During the quarter, Visa repurchased roughly 2.5 million share for a consideration of $324 million. The board of directors has authorized a new $1.5 billion class A share repurchase plan, in place through October 2013.

CEO and Chairman Joseph Saunders commented on the results, "Visa delivered strong financial performance for the fourth quarter and full year, a result of our focus on growing our core business, accelerating expansion of our business outside the US and investing in next-generation technologies that will define the future of payments."

Detailed Information

During the quarter, payment volumes growth was 5.9% in constant currencies, exceeding $1 trillion. Growth in the US came in at 0.8% to $521 billion. Growth was driven by a strong performance in Latin America, and Central Europe and the Middle East. In constant currencies, growth came in at 21.1% and 34.9% in both geographic areas, respectively.

Notably the credit card programs performed well. Total volumes rose 6.2% to $703 billion. Debit card programs volumes were up a mere 0.6% to $894 billion. New regulation which limit the possibilities to charge fees on cards, drive bank's marketing towards credit cards.

In total Visa processed some 14 billion transactions during the quarter, up 2% on the year.


For its fiscal 2013, Visa expects net revenue growth in the low double digits. The growth comes as a pleasant surprise to analysts who expected the company to guide for annual revenues of $10.27 billion.

Adjusted annual operating margins are expected to coming in around 60%. Diluted earnings per share are expected to grow in the high-teens for the coming year. Adjusted earnings for 2012 came in at $6.20 per share and could exceed $7 per share for its fiscal 2013. The outlook exceeds analysts consensus of $6.06 per share.


Visa ended its final quarter of its fiscal 2012 with $2.8 billion in cash, equivalents and investment securities. The company operates without the assumption of short and long term debt, for a comfortable net cash positions.

The market currently values Visa at roughly $116.3 billion, which values operating assets at roughly $113.5 billion. Based on 2012s annual results, this values the firm at almost 11 times annual revenues. The firm is valued at roughly 55 times annual reported earnings. Excluding the impact of the litigation provision, shares are valued at 27 times annual earnings.

Currently, Visa pays a quarterly dividend of $0.33 per share, for an annual dividend yield of 0.9%.

Investment Thesis

Year to date, shares of Visa have risen an incredible 41%. Shares rose from $100 in January to $120 in the first half of this year. Shares steadily rose to highs of $144 at the moment, despite the sizable $4.1 billion in litigation charges taken.

Over the past five years, shares have more than doubled. Between its fiscal 2009 and 2012, revenues rose from $6.3 billion to $10.4 billion. Net income fell from $2.4 billion to $2.1 billion in the meantime. Adjusted earnings, excluding the litigation charges, would have come in around $4.2 billion.

Regulatory changes in the payment industry will shift the focus from financial institutions away from debit cards to credit cards. The limited possibility to charge fees on cards will be limited. The shift towards credit cards was already visible in the third quarter earnings report. Lower consumer confidence makes consumers hesitant to "max" out their credit cards again, like they did before the financial crisis.

Both Visa and its smaller counterpart MasterCard are trying to boost their global presence. Across the globe, many consumers prefer to pay with cards and digitally instead of cash. Innovation with mobile payments will continue to evolve the way in which consumers pay.

I favor an investment in MasterCard over Visa, as the smaller competitor trades at cheaper revenue and earnings multiples. Furthermore I am more impressed with MasterCard's recent growth performance and its innovation regarding mobile payments.

Disclosure: I 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.