Visa Beats on Higher Transactions - Analyst Blog

Visa Inc.’s (V) fiscal first quarter (ended Dec 31, 2010) earnings of $1.02 per class A common share were substantially ahead of the Zacks Consensus Estimate of 91 cents. This compares favorably with the earnings of 74 cents per class A common share in the year-ago quarter.
 
The results for the quarter primarily benefited from transaction growth, driven by the company’s payments network and processing capabilities. Also, the overall economic hangover and new U.S. regulations have influenced the increased use of debit cards instead of credit cards. As a result, revenue rose across all categories. Growth in data processing and international transaction revenues were significant during the reported quarter.
 
Estimate Revisions Trend
 
Over the last 7 days, three out of the 33 analysts covering the stock have increased estimates for full year 2010, while none moved in the opposite direction. Currently, the Zacks Consensus Estimate for 2010 is a gain of $3.61 per share, which would be a 23.6% improvement over full-year 2009 earnings.
 
The absence of estimate revisions for 2010 in the downward direction indicates the likelihood of upward pressure on the performance of the stock in the upcoming quarters.

However, the reported quarter’s earnings surprise is not reflected in the estimate revisions yet. As a result, the stock retains its Zacks # 3 Rank, which translates into a short-term 'Neutral' rating. Also, considering the current fundamentals of Visa, we maintain a long-term “Neutral" recommendation on the stock.
 
With respect to earnings surprises, the stock remained steady over the last four quarters, with only positive surprises. The average surprise remained at 10%. This implies that Visa has surpassed the Zacks Consensus Estimate by 10% over the last four quarters. The current Zacks Consensus Estimates for the second quarter and full-year 2010 are earnings of 88 cents and $3.61 per share, respectively. The upside potential of the estimates for the second quarter and full-year 2010, essentially a proxy for future earnings surprises, currently stands at 1.1% and 0.8%, respectively.
 
Quarter in Detail
 
Visa’s GAAP net income for the quarter came in at $763 million, up 32.9% from $574 million in the year-ago quarter. Operating revenues for the reported quarter were $2.0 billion, up 12.7% from $1.7 billion in the year-ago quarter.
 
On a constant basis, payments volume increased 2.5% year-over-year to $720 billion. Total cards carrying the Visa brand increased 5% year-over-year to 1.8 billion. Cross border volume, on a constant basis, grew 2% year-over-year.
 
Total operating expenses for the reported quarter decreased 3.9% year-over-year to $743 million. The decrease was primarily a result of a $41 million pre-tax gain recognized for the prepayment of the remaining obligations under the Retailers' litigation.
 
On a constant basis, payments volume grew 8.5% over the prior-year quarter to $769 million.
 
Share Repurchase Update
 
In Oct 2009, the Board of Directors of Visa authorized a $1.0 billion share repurchase plan through Sep 30, 2010. During the reported quarter, the company repurchased 5.5 million shares at an average price of $78.78 each for a total cost of $432 million. At the end of the reported quarter, $568 million remained available for repurchase under its existing share repurchase authorization.
 
Outlook
 
For fiscal 2009, Visa expects annual net revenue growth in the range of 11% to 15%; annual operating margin in the mid to high 50% range; GAAP tax rate in the range of 36.5% to 38.5%; and capital expenditures about $200 million.
 
Unlike credit-card companies, Visa is not involved in lending money, so it has been less hurt by the credit crisis. We expect continued synergies from Visa’s effective marketing efforts and cost-cutting initiatives.
 

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