Current Price: $181 Price Target: $185
Position Size: 4.3% TTM Performance: 29%
Visa continued to perform well in the third quarter with better than expected revenue and EPS. Net revenue was +11% vs street +8%. EPS was $1.37 vs consensus $1.32. Full year revenue guidance reiterated and EPS guidance raised on lower client incentives. Purchase volumes accelerated from last quarter but were slightly weaker than expected. Easter was blamed for weakness last quarter and benefited this quarter. Cross border, which accounts for about a quarter of gross revenue and is higher yield, also improved. Fluctuations in exchange rates leads to choppiness in this business. They reaffirmed full-year 2019 net revenue growth of "low double-digits" on nominal basis and slightly increased adjusted EPS growth to “mid-to-high-teens.” Management said volume growth through the first few weeks of Q4 remained solid.
Key Takeaways:
· They had 52 billion transactions (+10%) on their network driving >$2.2T in total volume, +9%, an acceleration from +8% last quarter. Credit was +7% and debit was +11%.
· US payments volume growth was ~9%.
· International payments volume growth in constant dollars was +2.2%. FX was ~670bps headwind.
· They saw decent growth across all geographies.
· Announced extension of their relationship with the largest issuer, JPM, through 2029.
· More emphasis on potential of Visa Direct – this capability supports long-term secular growth in non-traditional transactions (i.e. not consumer-to-business (C2B)). This enables direct, real-time, bank account to bank account transfers and is an important capability for them long-term that drives growth in B2B, B2C, P2P, G2C. This technology, which powers Venmo and enables new payment flows like an insurance reimbursement, massively increases their addressable market. Recently closed Earthport acquisition supports this, especially with cross border.
· Contactless payment will also be a growth driver – Many markets, including the US, are very underpenetrated. In more mature markets like Australia there’s 90% penetration. Contactless = wave your card over reader instead of swipe. It leads to higher penetration of small transactions where cash tends to be used.
· Total cards outstanding up 3% to 3.4B. One third credit, two thirds debit.
Valuation:
· Strong FCF continues to support buybacks.
· Trades at a ~3.5% FCF yield. Reasonable for a company w/ >50% FCF margins, high ROIC, and, absent a recession, should continue growing top and bottom line double digits.
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
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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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