Following the company’s fiscal 4Q earnings, Visa Inc. (NYSE: V) could be one of the best stocks to buy right now. Cross-border volumes were particularly hard hit in 4Q, as two-thirds of this spending has historically come from global travel. But payment volumes and processed transactions both bottomed in April, and have improved since then. We continue to expect secular growth in payment volumes and believe that solid cost controls and strong buyback activity will aid earnings.
Visa held an Investor Day on February 11. The company is focused on growing revenue from consumer payments (expanding credentials and acceptance points and driving user engagement), as well as from new flows (capturing new sources of payments and money movement between individuals, businesses and governments) and value-added services (helping clients grow profits and deepen partnerships). It is also working to strengthen its brand, and improving technology and security. Over the past two years, new flows and value-added services have grown significantly faster than consumer payments.
Visa noted that only 14% of the $25 trillion in global annual spending in 2019 was in digital form, indicating a long runway for growth as payments shift to digital. In the U.S., the company said that cash accounted for 55% of transactions under $10, representing a significant opportunity as Visa expands frictionless payment capabilities and as merchants lower their minimum charge requirements.
Visa noted that between 2009 and 2019, its 21% compound annual EPS growth was driven by operating levers (16%), including revenue growth and operating leverage, and financial levers (5%), such as lower tax rates and stock buybacks. Capital allocation priorities going forward include funding growth initiatives, returning excess cash through stock buybacks, and paying 20%-25% of earnings in dividends.
Visa has been especially active on the acquisition front. In July 2019, Visa acquired Earthport, which provides cross-border payment services to banks, money-transfer service providers, and businesses. Other acquisitions announced in the second half of 2019 include the token services and ticketing businesses of Rambus; Verifi, which provides technology solutions to reduce charge-backs; and Payworks, a provider of payment gateway software for point-of-sale.
We believe that tailwinds for Visa are both cyclical and structural in nature, and include generally favorable economic conditions (despite current coronavirus pressures), as well as the continued transition from cash to plastic for convenience, safety and rewards program benefits. We also note that the market for payment processors is far from saturated given that more than 80% of the world’s retail transactions are still done with cash and checks.
On October 28, Visa reported adjusted EPS of $1.12 for fiscal 4Q20 (ended September 30), down from $1.47.
Fourth-quarter net revenue totaled $5.1 billion, down 17% from the prior year, hurt mostly by sharply lower cross-border volumes due to pandemic restrictions on travel.
Payment volume in 4Q, on a constant-dollar basis, rose 4% year-over-year, to $2.35 trillion, while processed transactions were up 3%, to 49.6 billion. Cross-border volume fell 28%.
Adjusted operating expenses declined 5%, with a 6% increase in personnel costs more than offset by declines of 6% for marketing, 31% for professional fees, and 25% for G&A expenses.
For all of fiscal 2020, revenues were down 5%, to $21.8 billion, while adjusted EPS declined to $5.04 from $5.44 in fiscal 2019.
In January 2020, Visa agreed to acquire Plaid, a network that allows people to securely connect financial accounts to the apps they use to manage their finances, for $4.9 billion in cash.
In June 2016, Visa acquired Visa Europe in a transaction valued at 18.5 billion euros. The agreement called for an upfront cash payment of 12.2 billion euros, preferred stock valued at 5.3 billion euros, and an additional 1.0 billion euros (plus 4% interest) payable on the third anniversary of the closing; the payment was made in June 2019.
EARNINGS & GROWTH ANALYSIS
Along with its fiscal 4Q results, management again said that it would not provide revenue or EPS guidance due to pandemic-related uncertainty. It did say that client incentives in FY21 would likely increase to 25.5%-26.5% of gross revenues, up from 25.0% in 4Q.
The company’s primary sources of revenue are services, derived mainly from payment volume on Visa-branded cards; data processing fees, from the number of transactions processed; and international transaction fees on cross-border transactions. Transaction volumes have generally benefited from both economic growth and the increased use of cards rather than cash, although the COVID-19 pandemic has sharply lowered spending, particularly in cross-border transactions due to international travel restrictions.
Payment volume and transactions processed have shown month-to-month improvement since bottoming in April. After a 5% revenue decline in FY20, we look for a recovery to 8% growth in FY21; however, we look for cross-border transactions to remain a drag until the back half of the fiscal year, when we expect fewer restrictions on international travel.
Trends in client incentives (a revenue offset) are important to watch. These have typically been in the 22.5%-23.5% range of gross revenues, but recent renewals are expected to push the figure over the 25% mark in FY21. Given the challenging revenue environment, management remains keenly focused on operating expenses, especially marketing costs.
With spending volumes remaining under pressure, particularly cross-border volumes, we are lowering our FY21 EPS forecast to $5.88 from $6.04 and setting an FY21 estimate of $7.00.
FINANCIAL STRENGTH AND DIVIDEND
In August 2020, Visa issued fixed-rate senior notes in a principal amount of $3.25 billion with maturities ranging between 7 and 30 years, and interest rates from 0.75% to 2.0%. As of September 30, 2020, the company had long-term debt of $21.1 billion and a debt/equity ratio of 58%, but with high operating margins in the upper 60s.
In October 2020, it announced a 7% increase in the quarterly payout to $0.32, or $1.28 annually.
Visa repurchased 8.2 million class A shares in 4Q20 for $1.2 billion, and 44.2 million shares for $8.1 billion in all of FY20. We look for a 3% decline in the average share count in FY21.
MANAGEMENT & RISKS
Alfred F. Kelly became the company’s CEO in December 2016 after Charles W. Scharf resigned for personal reasons. Mr. Kelly had joined Visa’s board in 2014 as an independent director. He was elected chairman in April 2019.
Management is transparent with investors, in our view, providing a range of financial projections for the business, including revenue growth, client incentives, operating margins, tax rate and earnings growth.
Visa Inc. operates the world’s largest electronic payments network, providing processing services and payment product platforms, including credit, debit, prepaid and commercial payments under the brands Visa, Visa Electron, Interlink and PLUS.
We think that Visa and MasterCard merit similar multiples. Visa has higher operating margins, while MasterCard is growing earnings slightly faster. Visa is a large-cap name with consistent, and, we believe, enviable mid-teens earnings growth prospects.
We believe that Visa’s typical mid-teens earnings growth makes for a compelling story even without P/E multiple expansion. A PEG multiple of 2.0 is also warranted given the company’s high 60s operating margins.