Visa Inc. (V) - Down, no Up, It’s Everywhere (you want to be)
After reporting earnings after the close Monday, Visa Inc. (V) traded in a schizophrenic pattern Tuesday ending the day at a new record high. The stock closed at $80.88 which is 84% above the offering price for those of you keeping score at home. This after gapping down more than three dollars shortly after the opening bell. Traders initially had a bit of trouble deciding whether the earnings report was net positive or negative, but by the end of the day, it appears Wall Street is happy with the numbers.
Digging into the statistics, the company reported pro-forma earnings of 0.52 on revenues of $1.5 billion dollars. Management said that the strength was broad with contributions from service fees, data processing fees and international transaction fees. However a Wachovia analyst pointed out that the results were primarily driven by price increases which originally took place in June and so have yet to factor into year over year numbers as well as lower than expected incentive fees. It would be much more impressive to see strength due to a strong uptick in transaction volume but the higher revenue is still a positive.
One of the issues that makes Visa especially difficult to analyze is that the company reports operational performance on a trailing quarter basis. So while the report was for the second quarter (ending March 31), many of the metrics are only available for the quarter ending Dec 31. Specifically; the payment volume was $681 billion which is up 19% over last year, total cards in circulation amount to 1.6 billion which is up 16%, and total transactions processed were 11 billion up 16%. However, since these figures are over 3 months old, it is difficult to see what kind of trends have already begun surfacing in a weakening economy which included a major financial institution failure and an unprecedented decline in consumer confidence.
The tone of the conference call appeared constructive with management cautiously optimistic as to the prospects for the rest of the year. While pointing to a weakening economic backdrop and possible slowdown in the second half, the company is still expected to meet its long-term stated goals:
- Revenue growth of 11-15%
- EPS growth of 20% or better
- Operating margins in the low 40% range
- Annual free cash flow above $1 billion
It is also noted that the company processes an estimated 40% of volumes from non-discretionary spending which should help to insulate the company from a weakening economy. Similarly, 36% of the cost structure is characterized as variable meaning management has some element of discretion and could pull back if revenue were to begin to lag expectations.
Speaking of discretionary costs, advertising expense came in a bit weaker than the Merrill Lynch analyst expected. While reducing this cost had the effect of beefing up the margins, advertising will almost certainly pick back up in the second half as the Olympic events will be a strong venue for the company to market its brand. Investors are likely pricing in a strong period during the Olympic games and it will be interesting to see how the global economic picture fits into the scenario. In the meantime, the stock is trading at a healthy multiple and has had a very strong run since the IPO. It would not be surprising to see the stock correct from current levels and I would play the name with caution.
FD: Author has a position in V
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