Visa: No Incentive To Own

| About: Visa Inc. (V)
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Visa reported FQ2 earnings that repeated a trend of slower-than-expected growth.

The payments processor faces negative trends of brands, requiring higher incentives in contract negotiations along with delayed international expansion.

The stock remains too expensive with stock gains on the backs of multiple expansion and not earnings growth.

Quarter after quarter, Visa (NYSE:V) churns out single-digit growth metrics. The market though values the payments processor at high-growth multiples, questioning the reasons for chasing the stock.

My recommendation on and off for the last couple of years was to avoid the stock at times when it reaches high valuation multiples. While the stock has continued moving higher in spurts, the reasons for owning Visa continue to decline. The question remains whether the market has any incentives for owning the stock.

The company saw limited FQ2 growth in both the top and bottom line though impacted by currency. The top-line revenues only grew 6% while EPS grew 7% to $0.68. The stock though traded for $80 and a P/E multiple of 25x FY17 estimates. The currency impact will subside, but the growth metrics would still only bounce to 10% growth rates.

While Visa continues seeing solid growth in transactions and payments volumes, the business in general is under increasing pressure for more incentives. My negative investment theme is enhanced by the concept that client incentives are expected at the high end of forecasts of up to 18.5%. For FQ2, client incentives grew 17% YoY to reach 18% of revenues, cutting big time into net revenue growth. The number is expected to reach 19% of gross revenues in 2H of the year.

Source: Visa FQ2 presentation

At the same time, some of the bullish thesis going forward is in delayed status. The Visa Europe transaction is still under European Commission review including some modifications to the deal and China in an unsurprising fashion isn't making much progress towards the domestic license.

These repeat themes that the rest of the world isn't willing to let Visa enter the markets and earn above-market margins. Especially in the case of China, the expectation remains that the ability of Visa to enter the market is mostly lip service offered up by Chinese officials to provide the appearance of an open market. So far, Visa has signed several partnerships for the country while stating that no real update exists for the simple concept of applying for a domestic license.

While Visa continues to see pressures to turn volumes growth into earnings growth, the company still generates astonishing mid-60% operating margins. The market is so in love with these margins that the stock price gains over the last couple of years were solely based on P/E multiple expansion.

V Chart

The key investor takeaway is that Visa is a slow growing business with general downside risk mostly ignored by the market. The recent incentive laden deals with Costco (NASDAQ:COST) and USAA are prime examples of how the business landscape is evolving. The stock should not trade at multiples equivalent to fast growing businesses.

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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.