Current price: $198 Target price: $210
Position size: 4.3% TTM Performance: 7%
Key takeaways:
· Visa reported slightly better than expected revenue and EPS.
· Cross-border headwind until travel recovers: weak cross border volumes continue to be a headwind. Still down 44% in July as travel restrictions prevent higher volumes.
· Sequential improvement in volumes: saw spending improve each month as most countries began to relax domestic restrictions.
· Current environment could be secular growth catalyst: While cross-border will be headwind for the foreseeable future, current environment may be a catalyst to further displacement of cash aided by faster uptake of contactless and higher e-Commerce penetration.
Additional Highlights:
· Net revenues in the fiscal third quarter were $4.8 billion, a decrease of 17% or 16% in constant dollars. All of the business drivers were significantly impacted by the pandemic – as payment volume was down 9.9% and cross border was down 37%.
· Notably, total credit volume was down 20.4% (cc) while total debit volume increased 2.7% (cc).
· U.S. debit volume up 8% vs. credit down 21%, while international debit volume was down 2.7% vs. credit -19.9%. In the US, government assistance issued via Visa Prepaid cards added “several points” to debit in May and June.
· In terms of geographic performance for payments volume, every region was down with the sharpest decline in Asia Pacific (-16.1%) follow by Canada (-15.2%),LAC (-12.6%), Europe (-10.2%), U.S. (-7%) and CEMEA (-5%).
· Improvement in US volumes: “For the quarter U.S. payments volume declined 7%, a sharp decline from mid-April was followed by a V-shaped domestic spending recovery. Volumes declined 18% in April, before returning to positive territory in June. July volumes through the 21st are up 7%. This recovery was jump-started by the economic impact payments and enhanced unemployment benefits, helped along by pent-up demand fulfillment and accelerated by the relaxation of shelter in place requirements.”
· Cross border ex. intra-Europe (-47%) was worse than overall cross border (-37%), as some level of intra-Europe travel is occurring. A key variable to improving net revenue growth is an improvement in this cross border ex. intra-Europe. This will likely be one of the last metrics to fully recover to pre-COVID levels. As boarders re-open there could be pent-up demand for travel, subject of course to any weakening in the macro environment. Mgmt. said that in corridors where restrictions have been relaxed, such as U.S. to Mexico & Caribbean or Switzerland to Germany & France, cross-border volumes have recovered quickly.
· Cross-border e-commerce continues to grow – while overall cross-border volumes are down, transactions have done better. This is the result of a mix shift from higher ticket travel expenses like hotels to lower ticket e-commerce purchases. Growth in cross border e-commerce spend ex-travel has been up high-teens to low-twenties since mid-April.
· Continued move away from cash – “card not present” spend ex-travel grew 25% every week since mid-April which is 2x the pre-COVID growth rate. There is still $18 trillion transacted in cash and check globally.
· Card present spending improved steadily through the quarter as re-openings went into effect from declining almost 50% in early April to declining in the high single-digits by late June, but there has been little improvement since.
· Spending impact by category, each are ~1/3 of US spending volume:
o Covid beneficiaries (i.e. food and drug stores, home improvement and retail goods) – These categories have consistently grown at or above their pre-COVID growth rates in the high teens or even higher every week since mid-April.
o Modestly hit categories – This group includes categories that experienced spend declines between 10% to 50% in April and had all recovered to growth by the end of June. These segments include automotive, retail services, department and apparel stores, health care, education, government and business supplies.
o Hardest hit categories – These categories declined over 50% in April and are still declining year-over-year, although, each improved by between 20 to 45 points during the quarter. This group includes travel, entertainment, fuel and restaurants. Travel remains the most impacted category still down over 50%. Fuel gallons purchased are growing again, but spend is down more than 15% in July driven by lower prices.
· Continued growth in new flows (i.e. P2P, B2B, G2C): Key growth area which they identify as a $185T opportunity. In the US, Visa Direct was up over 75% this quarter due to strong growth in a variety of use cases ranging from P2P, to insurance payouts, to payroll. In P2P Visa announced a global partnership with PayPal including its Venmo, Braintree, Zoom, iZettle and Hyperwallet brands. This is an extension of a long-standing regional partnership with PayPal. Visa reported US P2P up 80%. In G2C the U.S. Treasury distributed nearly four million economic impact payments via Visa prepaid cards.
· Capital allocation: Buyback plans and their dividend policy remain unchanged. In Q3 they returned ~$1.5B to shareholders through dividends and buybacks.
· Valuation: trading at a ~3.5% FCF yield on 2021 vs S&P ~3.9%….reasonable for a company w/ high moat, powerful brand, vast global acceptance network and LT secular growth – despite near term headwinds.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$V.US
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