Summary:
Visa’s acquisition of Visa Europe will open vast business opportunity for Visa in
Europe and will provide it greater scale and size diversified business. Its other
strategic acquisitions and alliances, technology upgrades, effective marketing efforts
and debt-free balance sheet bode well for long-term growth. The U.S. consumer
growth remains strong and is expected to continue boosting Visa’s revenues in the
future. Overall, the company expects a low double-digit constant dollar earnings
growth. However, weaknesses in China, Brazil and other oil-based economies; a
stronger U.S. dollar and global economic uncertainty are expected to dampen crossborder
revenues. Visa will release earnings on Jul 21. The Zacks Consensus Estimate
for fiscal third quarter is pegged at 67 cents per share which translates into year over
year decline of 9.64%.
Reasons To Buy:
Visa acquires Visa Europe – The company has completed the acquisition of Visa Europe.
Reuniting with Visa Europe was one of the company's most important long-term growth
strategy. The company stands to gain a competitive edge from a strong business model with
the acquisition of Visa Europe as it projects Europe to be a $3.3 trillion payments market and a
high growth region in the future. Already the leading card processor, the addition of Visa Europe
will further boost Visa’s market position against global arch rivals like MasterCard Inc.,
American Express Co. and Discover Financial Services. Visa expects low single-digit growth in
first full year post acquisition followed by high-single digits upto 2020 excluding transition costs.
Growth in Electronic Payments – Over the recent years, the shift within the global payment
industry from paper-based forms of payment such as cash and checks toward electronic forms
of payment such as card payment transactions has created significant opportunities for Visa’s
business growth. Electronics payments are expected to flourish in the next five years. Though
economic growth is likely to be normal to modest, the electronic payments market is expected
to perform well in the long run. Visa, which makes up for almost half of credit card payments and three-fourth of debit card
payments, dominates the global electronic payments market. VisaNet is capable of processing 65000 transaction messages per
second. Despite increasing competition in the electronic payments space, Visa is expected to reign as the market leader as few
competitors can match its investments in technology, security and marketing.
Visa’s New Initiatives to Bring Growth – Visa’s new initiatives to accelerate secure mobile payments by adopting the pay Wave
software application as well as near field communication (NFC) and EMV chip technologies globally support its growth. Visa has
partnered with MasterCard, and together they have set 2017-end as the deadline for U.S. retailers to adopt the EMV technology. It
has launched Quick Chip for EMV, which allows customers to remove their EMV chip card from the terminal in two seconds or less.
The launch of Visa Developer Platform is another initiative in line with Visa’s focused technology advancements. The company’s
mobile wallet service – V.me along with Visa Checkout has been successful. Visa has 12 million registered users in 16 countries
and 675 national institutional partners participating globally in Visa Checkout. The service is expected to be launched in six
additional markets including India, France, Ireland, Spain, Poland and United Kingdom later this year. Over 250,000 merchants will
accept Visa Checkout, which represents a $113 billion addressable volume. Additionally, the launch of Visa Token Service (digital
tokens instead of customer’s account numbers implemented by Visa and its peers) and Authorize.Net on Apple Pay, PayPal and
AliPay along with consistent focus on improved security measures and strategic alliances with various financial institutions for
mobile payment applications will further accentuate the efficiency of cards within eCommerce and mobile payments (mCommerce).
Given a greater flexibility, superior security and low cost of maintenance, demand for these electronic and mobile payment facilities
are expected to rise by leaps and bounds in the future.
New and Renewed contracts – Visa expects to see positive additions from the Costco and USAA conversions in 2017. It has been
successful in getting a renewal of a multi-year credit and debit agreement from Navy Federal Credit Union, the world’s largest credit
union and one of Visa’s most important clients in the U.S. From Jun 20, Visa cards will be exclusively accepted at Costco U.S. and
Puerto Rico warehouse locations and fuel stations. Visa also renewed multi-year credit card agreements with Banco do Brasil,
South America’s largest bank and SBI Card, State Bank of India’s credit card venture. Visa also intends to increase its presence in
China, which is expected to be a major growth driver once the nation’s economy improves. The company is also preparing to apply
for domestic license and position itself to compete domestically in China and continue to invest locally in the country. It has signed a
MoU with UnionPay which should provide an important platform to strenghten and create new value for various stakeholders in the
sector by collaborating on payment security, innovation, and financial inclusion. It is building relations with the Chinese governemnt
by announcing partnerships with two foundations to support the government’s poverty alleviation efforts and promote inclusive
finance. It has also entered into a cooperation plan which establishes Visa as a strategic partner of U.S. China’s Tourism Year.
These initiatives are expected to boost Visa’s top-line growth.
Strong Balance Sheet Position – Despite the economic turmoil that eroded the reserves of most of the organizations, Visa enjoys
a strong cash and available-for-sale investment position along with strong free cash flow reserve, posing a risk-free balance sheet.
This not only provides an operating leverage to the balance sheet but also provides acquisition opportunities as well as scope for
capital expenditure that will enhance long-term growth. Backed by its strong cash position, the company increased its dividend each
year since 2009. The company has also resumed its share buyback which was suspended in fourth quarter 2015, due to the
impending Visa Europe acquisition. Thus the resumption of share buyback will further aid the company’s bottom-line.
Risks:
Strong U.S. Dollar hampering revenues – The U.S. dollar is expected to retain strength in the coming quarters especially if the
Fed hikes rates. A strengthening U.S. dollar will translate to reduced cross border spending on U.S. goods. It will also hurt
revenues. In the fiscal second quarter a 14% growth in Interntational payments volume in constant dollars,was offset by a strong
dollar that limited volume growth to 4%. A decline in dollar relative to other major currencies would improve spending levels but
until such a trend resurfaces, it will continue to pressurize revenues.
Domestic Factors and Client Incentives – Visa expects weaker domestic payments volumes in the coming quarter due to
persisting lower gas prices. Client incentives, which reduce revenues, are expected to be on the higher end of the expected range
of 17.5–18.5% . This will come from by significant renewals and conversions mainly from U.S. Costco and USAA which adds
more than 50 basis points to increntives and a percent of gross revenues in the second half of fiscal 2016. Since there was a delay in the rollout of Costco and USAA conversions, revenues recognized exceeded incentive expenses. Visa expects this trend
to turn in fiscal 2017, which should benefit the company.
Macroeconomic concerns in international markets–Visa’s revenue growth has slowed down in the previor quarters due to
adverse international macroeconomic factors. Cross-border outbound commerce in China fell to single digits from 40% in yearago
quarter. Canada has shifted from growth rate to negative levels. A further deterioration has been observed in commoditydominated
economies such as Middle East and African economies as well as Brazila and Russia. In the fiscal third quarter too,
Visa expects weakness in commodity-based economies. Collectively, a slowdown across several major economies and lower
forecasted GDP growth rate, will continue to have a negative impact on revenues and growth.
