During the quarter, Visa exceeded expectations in revenue growth, operating margin and EPS. Global volume increased, and results in Europe exceeded expectations since the acquisition of Visa Europe last year. Visa predicts high single digit volume growth and adjusted EPS growth in the mid-teens for FY 2018. Visa continues to invest in the business while actually increasing its predicted shareholder payouts in 2018. Reviewing price target.
Current Price: $109 Price Target: $99
Position Size: 3.0% TTM Performance: +35% (purchased a year ago)
1.) Visa reported 4Q 2017 approximately 5% ahead of consensus with revenue growth of 13.9% yoy
a. Reported operating margin of 66.2% as well as adjusted EPS of $.90 were ahead of consensus estimates for the quarter
b. Cross border volume increased 10% and revenue was up 20% due to product mix
c. US payment volume increased ~9% (helped by Costco and USAA) while European payment volume was up over 10%
d. Processed transactions increased 13% while rebates/incentives were in line with estimates increasing 36%
2.) Europe played a major role in positive earnings during the quarter; this was the first quarter with Visa Europe included in prior year reported earnings. European strategy seems to be ahead of schedule
a. European growth exceeded original expectations, contributing mid-single digits to EPS growth for FY 2017
b. Europe net revenues were ahead of acquisition model projections and operating expenses were below projections
c. They were able to get approximately 75% of contract renewal conversions in the region; the 25% of delated conversions will be delayed until FY18 adding 50 bps to incentive expectations
3.) Visa issued guidance for FY18, predicting high single digit global volume growth with second half numbers expected to improve on first half
a. Net revenue growth expected in the high single digits with highest growth coming in 4Q
b. Adjusted operating expense growth in the mid-single digits gradually shifting lower in the second half of the year
c. Adjusted EPS growth on the higher end of mid-teens led by highest growth in 4Q 2018
4.) Visa commands a premium multiple thanks to the secular growth nature of their business and limited cyclicality. FCF is expected to nearly double by 2020 and V trades at a 4% FCF yield today
a. .7% dividend yield and buyback focused on offsetting Visa Europe dilution at the moment. Visa returned $8.5 billion to shareholder in 2017 and plans to increase that to over $9 billion in 2018 while continuing to invest back into the business
b. Price target increased being reviewed
Investment Thesis:
1. Visa is the number one credit and debit network worldwide – accounting for about half of all credit and roughly three fourths of all debit card transactions (Nilson Report)
2. We are still in the earlier innings of the digitization of electronic payments. This is a secular tailwind supporting Visa’s growth as 1.) Electronic payments continue to replace cash 2.) Commerce moves online 3.) Consumer spending grows globally
3. Visa’s asset light “toll booth” business model is characterized by recurring revenues, high incremental margins, low capital expenditures, and high free cash flow. Increasing shareholder returns: Trailing real yield of ~3% (2% buyback +1% dividend yield) with room to grow distribution over time
4. Visa’s recent acquisition of Visa Europe should be a nice tailwind over the next few years as the European market is in the earlier stages of electronic payment adoption ($3.3 Trillion dollars of cash still changes hands in the EU) and Visa is well positioned to gain market share and improve margins in the region