Current Price: $142 Price Target: $160
Position Size: 3.3% TTM Performance: 25%
Visa reported a mixed Q4 with revenue slightly below the street but better than expected EPS. For FY18 revenues were +12% and EPS was +32%. Tax reform added 10 points to EPS growth. For full year, currency added 1% to top line and 1.5% to EPS. Strengthening dollar meant Fx went from a 150bps tailwind in Q3 to a 50bps headwind in Q4. They issued solid 2019 guidance in line with street. Full year revenue growth guided to up low-double-digits and EPS up mid-teens. This time last year they guided to high-single-digit revenue growth – they ended up with +12%. So incrementally more positive on outlook going into 2019. Management pointed to the US consumer being stronger than they expected. Debit growth (which skews younger and lower income) has also been stronger.
Key Takeaways:
· They had broad based growth in global purchase volume. Total volumes were just over $2 trillion for Q4, +11%. Volumes were $11 trillion for the year.
· Double digit volume growth in all regions except Europe. US purchase volume up 12%, Europe up 9%.
· They say the US consumer is in “very good shape.”
· Cross border volumes were consistent with last quarter at +10%. Stronger dollar is a headwind.
· For the year, cards outstanding increased by 80m to 3.3 billion.
· Client incentives are expected to be higher in 2019 by about 150bps. Contract renewals driving this.
· The integration of Visa Europe continues to progress ahead of expectations and nicely accretive to margins.
· Updates on growth initiatives…
· Contactless payment penetration continues to rise globally – this is in very early stages in the US.
o Contactless is not just paying with a phone, it means paying with a card enabled w/ near field technology. So you just wave the card in front of the reader.
o Rising penetration of contactless cards should be a tailwind to volume growth because it tends to capture a greater portion of smaller transactions.
o Very few cards in the US have this. Issuers are expected to ramp up distribution of enabled cards in part because transactions are more secure since they use tokenization.
o In the US, 70 of Visa’s top 100 merchants now accept contactless and management said they expect 100 million enabled cards by the end of 2019.
o In the past 3 months 7-Eleven, CVS and Costco enabled contactless.
o Since Costco US enabled contactless in August they’ve seen 50% penetration w/ their co-brand cards.
o Globally, penetration is at 25% of face-to-face domestic transactions. 40% if you exclude US. Australia is most penetrated at 90% of face-to-face transactions.
· Visa Direct– key way they are capturing incremental payment flows. Global growth over 100% in Q4.
o Visa Direct is real time payment technology that allows Visa to participate in different types of transactions like bill pay, P2P (e.g. Venmo), instant paycheck (e.g. Postmates instantly paying their delivery workers), B2B transactions, insurance payments, healthcare reimbursement, etc. Things that were previously accomplished through check, ACH or cash.
o For the US, this is a $10 trillion opportunity: $1 trillion in P2P and $9 trillion in business disbursements
· Visa is also working on standardizing digital checkout with the “Common Button” – an association 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. This is a threat to PayPal.
Valuation:
· FCF for the year was $12B and YTD is $8.7B. Trading at a 4.7% FCF yield.
· Returned $9B to shareholders. $7B in buybacks and $2B in dividends.
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
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