In the last month and a half, Visa’s (V, Financial) share price has climbed an impressive 24 percent on strong earnings in the third quarter and company’s commitment to return value to its investors via a massive buyback exercise and ongoing dividend. Additionally, China’s plans to open up its market for clearing domestic bank card transactions translates into an opportunity of a whopping $1 trillion a year, which is definitely a lucrative position for Visa and like companies. Considering that the stock price has notched up so quickly, it is prudent to analyse if the company has run out of steam or still presents a good investment option.
Q4 highlights and FY 15 outlook
For the fourth quarter fiscal 2014, Visa reported robust results and successfully met the Street expectations. The fourth quarter saw an increase of approximately 8.6 percent in Visa's operational revenue to $3.3 billion in the fourth quarter. Operating income for the company decreased to $1.55 billion, down by 11.4% relative to the corresponding quarter of the previous year. Net income for the company came in at $1.07 billion, 10% lower than the net income reported in the previous year. Diluted earnings per share decreased over last year's fourth quarter from $1.85 per share to $1.72 per share in the quarter. However, the adjusted net income for the quarter amounted to $1.4 billion, translating into diluted earnings per share of $2.18. These were 14% and 17% higher, respectively, over the prior year's results.
In addition, Visa also noted a 3% increase in its operating margins, which came in at 62% for the quarter. Gross profit margin amounted to 67.5%, while the net profit margin amounted to 43.10%. This was higher than the margins calculated in the prior year, and also outperformed the industry average. In conclusion, it is quite clear that Visa is consistent with its strong performance trend and has again leveraged the increasing reach of ecommerce to its advantage. Besides delivering a strong fourth quarter, Visa’s shares also saw an uptick owing to a positive guidance that met investor expectations. For FY 15, Visa expects low double-digit constant dollar revenue growth with Forex having a 200 bps negative impact. The margins are expected to stay in the mid-60s range, which is consistent with the payment giant’s previously reported figures. On similar lines, the payments volume is expected to surge slightly as Visa expects the volume to grow at 11 percent on year-over-year basis.
Mobile payment is the next big thing
While the results definitely highlight Visa’s strength in the payments processing industry, it does not reveal a lot about the digital churn that is taking place inside the company. However, in the earnings call, Charles Scharf made a mention about the ongoing digital churn within the company and management’s sharp focus on this space. It is significant to note that online transactions make up almost 19 percent of Visa’s overall business operations, that online, tablet and mobile purchases are growing at high double digit to triple digit rates versus a face-to-face rate of single digits in the United States. Visa has a wide collection of services that address its digital segment and that includes Visa Checkout, Visa Token Services, Visa Digital services and Apple Pay.
Yes, you heard it right. Visa has partnered with Apple (AAPL, Financial) to launch Apple Pay, allowing users to pay for items with the tap of a button. With mobile payments estimated to be a $1 trillion industry by 2017, Visa can nurture its growth by tapping into this new emerging market. The phenomenal growth of ecommerce companies along with better internet penetration has fueled the market for mobile payments and therefore, Visa is in the sweet spot.
This step by Visa to collaborate in launching Apple Pay is a strategic move that could pay off well in the future. The mobile payment industry is a fairly large one, and though it may be competitive, it has considerable room for rivals to operate in it as well.
Takeaway
Visa has been a leader in the payments processing industry and the surge in the mobile payments industry is another reason to participate in Visa’s story. At the beginning of this article, I mentioned how Visa has gained extraordinarily on the exchange. However, the stock has not yet run out of steam and can climb further owing to its strong fundamentals and favorable tailwinds in the industry. Trading at a multiple of around 29.7 times the earnings, this stock is a fair buy.
