Visa Earnings Preview: A Classic Growth Stock With A Rich Valuation

| About: Visa Inc. (V)
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There have been few flies on Visa (NYSE:V) this year with the stock up 36% year-to-date as of Friday's still-in-effect close, and excluding the dividend, which was just boosted 50% to $1.32 per share per year from $0.88.

When Visa reports fiscal 4th quarter, 2012, results after the bell on Wednesday, 10/31, analyst consensus will be looking for $1.50 in earnings per share on $2.67 bl in revenue, for expected year-over-year growth of 18% and 12% respectively.

Visa's expected gross margin is thought to be in the neighborhood of 58% and net margins should be around 40%.

Expected Q4 '12 revenue and earnings estimates have been fairly constant since the July earnings report.

Despite the debit volumes hit that Visa / Mastercard took in the Spring thanks to the wonderfully backward-looking Durbin Amendment (brought to you by the fine US Senator from the State of Illinois, Dick Durbin) Visa hasn't budged much and in fact volumes have recovered despite the debit hit in April.

While most think of Visa as a financial company, it is really a global technology company with a financial services wrapper.

Visa reported US volumes growth of 1% in June, a 1% decline in July, and 2% growth in August. According to a 10/28/12 note out of Sterne Agee, "visibility into quarterly revenue growth is fairly good for Visa given that half of Visa's quarterly revenue (service fees) is driven by payments volume from the prior quarter."

Our biggest worry about Visa is the valuation: the stock is trading at 23(x) 4-quarter trailing cash flow and 22(x) the expected 2012 consensus earnings per share estimate of $6.16, with 23% and 16% earnings growth expected this year and next.

Last quarter - the fiscal 3rd quarter - Visa reported US credit volume grew 9.8%, down from Q2's 11.9%, while the rest of the world (ROW) payment volume grew 10.4%, versus the prior quarter's 15%.

Visa management also commented that they saw "no discernible deterioration in consumer spending" in the June quarter.

With a strong calendar Q4 '12 and holiday shopping season expected this year, what with the launch and re-fresh of the Apple product line, we wouldn't expect any issues with Q4 '12 consumption, as long as the Presidential election and the Fiscal Cliff doesn't somehow rear up prior to year-end.

While at a brokerage firm dinner last night, the strategist said that he thought that the payroll tax cut would be repealed in Q1 '13, and that it is possible that consumption could get hit 3% - 4% in the first quarter of the year, all of this relating to the fiscal cliff. This will no doubt show up in consumer spending and credit volumes, if it does happen, and Visa / MasterCard would likely suffer a sizable market haircut.

Our first level to add to the name would be $120, and then again near $100.

Disclosure: I am long V. 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.