While Visa Inc. (V) came out firm from its fiscal 2011, we reiterated our Neutral recommendation on the stock based on the cautious growth outlook for fiscal 2012 amid regulatory challenges.
Visa’s fiscal fourth quarter 2011 (ended September 30, 2011) operating earnings of $1.27 per Class A common share were triple pennies ahead of the Zacks Consensus Estimate. Results also substantially exceeded $1.06 per share reported in the year-ago quarter on lower share count. GAAP net income for the quarter stood at $880 billion, climbing 13.7% from $774 million in the year-ago quarter.
For full fiscal 2011, Visa’s operating earnings of $4.99 per share increased 20% year over year but were ahead of the Zacks Consensus Estimate by a penny. Additionally, excluding the non-operating gain related to revaluation of Visa Europe put option, operating net income escalated 22% year over year to $3.5 billion.
Since its inception, Visa continues to grow through a healthy product boutique and huge network expanse. The company remains focused on the needs of its customers and continues to add value amid a challenging economic environment through its array of products that are user-friendly and flexible.
Moreover, the recent acquisitions of CyberSource, PlaySpan and Fundamo along with other strategic alliances with Isis, Monitise, CashEdge and Fiserv complement with Visa’s latest eCommerce and mCommerce growth strategy, while also reaching out the banked and unbanked consumers in developing nations. The company’s new initiatives to accelerate mobile payments through the adoption of EMV and NFC technology in the U.S. and Europe are also encouraging.
Meanwhile, a disciplined expense management strategy has been aiding cost-controls and enhancing operating leverage. Hence, going forward Visa persists to realign itself to enhance its competitive position and capitalize on the most promising growth opportunities from both a geographic and product development standpoint.
Increased free cash flow outlook in fiscal 2012 paves way for ample growth opportunities, capital deployment through strategic acquisitions and alliances, higher stock buybacks and dividend payouts also enhances investors’ confidence.
However, being a leading global operating organization, Visa is subject to increasing global regulatory focus in the payments industry, including key markets such as China, Europe, Australia, Canada and Brazil. The regulations also impose numerous costly new compliance burdens on the company. The capping of debit interchange fee at 21 cents, down from 44 cents, has also been implemented, under the Dodd-Frank Act, last month.
This profound slashing will hamper revenues of the banks, which in turn will affect the card companies as banks would now try to trim the fee that they pay to use the respective card networks. Moreover, in order to stay competitive, the authorization and settlement fee per transaction is also expected to decline over time.
Besides, the new regulation is expected to be more severe on Visa than its peers, such as MasterCard Inc. (MA) and American Express Co. (AXP), since the former is more exposed to the debit processing market. Concurrently, a part of these costs are shifted to the consumers, which impacts consumer spending and results in the risk of declining value and payments transaction volumes through its systems.
Hence, Visa’s growth is expected to slow down in 2012, which is also reflected from its top-line growth guidance in high single-digit to low double-digits range and bottom line growth in the middle-to-high teens. This is way below the over 20% earnings growth recorded in fiscal 2011.
Furthermore, Visa also faces several state and federal lawsuits such as litigations where interchange rates are violated, as well as those involving currency conversion practices and pricing structure. These have resulted in offering of significant discounts and other incentives to the U.S. merchants to steer clear cardholders to a particular network.
Based on the pros and cons, the Zacks Consensus Estimate is currently pegged at $1.45 per share for the first quarter of fiscal 2012, up about 18% over the prior-year period. For fiscal 2012, earnings are expected to grow about 17% over fiscal 2011 to $5.84 per share.
Additionally, currently Visa has Zacks #2 Rank, indicating slight upward pressure on the shares over the near term, while the long-term stance remains Neutral.
