Visa reported very strong 2Q18 results and raised guidance. Adjusted EPS was $1.11 (high end of street estimate was $1.06). Broad based global economic growth spurred an acceleration in payment volume growth, fueled by debit spending globally. International was particularly strong with an acceleration in cross-border volume (outbound from Europe, inbound to the US) driven by the weaker dollar. Payment volumes were up 10% and processed transactions were up +12%. EPS guidance raised from mid-20% growth to high 20’s growth. The integration of Visa Europe continues on pace with expectations. Revenue growth is now expected to be low-double-digits, up from the previous guidance of high-single-digits. Cards outstanding grew 4% (to 3.3B), with 2% growth in credit cards and 5% growth in debit cards. Debit cards continue to outpace, partly driven by Millennials who favor debit over credit. As expected, the trend of rising incentives continues as competition is intense for share of customers’ wallets and for business with issuers. Visa is continuing to develop new avenues for growth as the payments industry changes. Contactless payment penetration continues to rise globally. They are positioning themselves to grow in the evolving P2P and B2B markets. For example, in March they acquired Fraedom to help expand their B2B business. This expands their addressable market from the $45 trillion retail payment market to the $120 trillion B2B market and the $60 trillion P2P market. Visa is also in the early stages of standardizing their digital checkout. They recently announced an agreement with Amex and MasterCard to offer a common user interface for digital payments. The platform will create a single button checkout across sites and devices, eliminating the friction of online checkout across various sites.
QUARTER ENDED PAYMENT VOLUME (billions)
QUARTER ENDED TRANSACTIONS (millions)
Valuation:
· FCF for the quarter was $2.6B and YTD is $5.2B. Trading at over a 4% FCF yield.
· They’ve returned most of their YTD FCF to shareholders through dividends ($1B) and buybacks ($3.75B). They have $7.5 billion remaining for share repurchase.
Thesis:
· 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.
· 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
· Visa’s asset light “toll both” business model is characterized by recurring revenues, high incremental margins, low capital expenditures, and high free cash flow.
· 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 and Visa is well positioned to gain market share and improve margins in the region.
$V.US
[tag V]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
PLEASE NOTE!
We moved! Please note our new location above!