Current Price: $179 Price Target: $185
Position Size: 4.2% TTM Performance: 29%
Visa reported better than expected Q4 revenue and EPS. Net revenue was +15% and adj. EPS was +23%, $1.47 vs consensus $1.43. Payments volume growth was strong at +9% (constant currency). They introduced full-year 2020 guidance of net revenue growth of "low double-digits" and EPS growth of “mid-teens.” Guidance in-line with consensus but includes higher client-incentive fees due to a high level of contract renewal activity. In general, growth trends of their key business drivers – payments volume, processed transactions and cross-border volume – have been stable.
Key Takeaways:
· They had 47 billion transactions (+12.6%) on their network driving >$2.27T in total volume, +9%, in line w/ last quarter. Credit was +7% and debit was +11%. Cross border was +7%
· US payments volume growth was ~8% with credit growing 7%and debit 10%.
· International payments volume growth in constant dollars was 10%. The UK remains weak, but growth has now improved for two quarters after hitting a low in March.
· Expanding access with new players – This is critical to expanding credentials and acceptance globally. Deepened relationships with several FinTech partners across the globe including Chime, N26, Railsbank and Toss.
· Teaming up with Samsung to allow merchants to accept contactless payments with just an app download and no hardware. So in essence the phone becomes the terminal.
· Launched common button – they’ve been discussing this for a while. This is a joint effort between AmEx, Discover, MasterCard and Visa of a joint click-to-pay button that makes online checkout easier.
· B2B (Visa Direct) was 12% of volume in 2019. Recent developments in B2B include Visa Direct integration with Oracle ERP that allows customers to make payments directly from the account payable system.
· 2020 FCF should be ~$12B and they anticipate returning at least $12B to shareholders through dividends and stock buybacks.
Valuation:
· Strong FCF continues to support buybacks. Returned $2.7 billion of capital to shareholders in Q4 and $10.9B for the full year.
· Trades at a ~4% 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.
· Announced a 20% increase in their quarterly dividend to $0.30 – puts the payout ratio in 20%-25% range.
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.
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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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