VISA INC. $79(New York symbol V; Conservative Growth Portfolio, Finance sector; Shares outstanding: 2.4 billion; Market cap: $189.6 billion; Price-to-sales ratio: 13.9; Dividend yield: 0.7%; TSINetwork Rating: Above Average; www.visa.com) operates the world’s largest electronic payments network, through which it processes credit, debit, prepaid and commercial transactions. The company’s systems can process over 56,000 transactions per second.
Visa gets most of its revenue from fees it charges the card issuers and merchants that use its network. These are based on transaction volumes and other factors. The banks that issue the credit cards are responsible for evaluating customer creditworthiness and collecting payments, not Visa.
The company’s revenue jumped 57.5%, from $8.1 billion in fiscal 2010 to $12.7 billion in 2014 (fiscal years end September 30). Revenue likely rose to $13.9 billion in 2015. Earnings gained 83.3%, from $3.0 billion in 2010 to $5.4 billion in 2014. Visa is an aggressive buyer of its own shares, which is why its earnings per share soared 131.6%, from $0.98 to $2.27.
As part of a reorganization before Visa became a public company in 2008, it set up its European operations (Visa Europe) as an independent firm owned by over 3,700 European banks. This business uses Visa’s brand and payment networks under a licensing deal, and accounts for about 52% of Europe’s card market. The company is now negotiating to buy Visa Europe in a deal that would probably cost between $15 billion and $20 billion.
Combining overlapping operations would let Visa cut its annual costs by around $500 million. When Visa shifted from being a bank-owned entity to a publicly traded company, it widened its gross profit margin from around 30% in 2006 to 64.0% in 2014.
Visa can easily afford to buy Visa Europe. As of June 30, 2015, it was debt-free and held cash of $2.15 billion.
Innovations are transforming Visa
The company’s strong balance sheet is helping it develop new services like Visa Checkout, which makes online transactions faster and more secure.
Shoppers only have to register their Visa card once on Visa Checkout. Then they can use the same username and password at the websites of over 250,000 merchants in 16 countries. Making this information easier to enter encourages users to visit these websites more often— and spend more when they do.
In addition, Visa and other card-processing firms are pushing merchants to upgrade to terminals that accept chip-and-PIN cards, which are safer than older magnetic-stripe readers.
The new terminals will also encourage consumers to pay through smartphones. Visa is currently helping Apple (Nasdaq symbol AAPL) develop its Apple Pay system, through which users can make purchases with their iPhones. This alliance will let Visa profit as Apple Pay expands.
Meantime, the company has invested an undisclosed sum in Stripe Inc., a private firm specializing in mobile- and online-payment systems.
Stripe focuses on the underlying computer code that processes online transactions. It licenses these programs to over 20,000 websites and mobile apps.
Gaining access to Stripe’s technology will help Visa develop new online payment services, while Visa’s expertise makes Stripe’s transactions more secure.
Taking on the competition
Visa has also been taking business away from its main competitors. For example, the company and Citigroup (New York symbol C) recently won a contract to replace American Express (New York symbol AXP) as Costco’s (Nasdaq symbol COST) exclusive credit card provider.
Under the deal, which takes effect April 1, 2016, Costco will only accept Visa credit cards at its 481 warehouse stores in the U.S. In addition, Citigroup will offer Costco members a new co-branded Visa card with an enhanced loyalty rewards program, though shoppers can also use Visa cards issued by other banks. This deal should increase Visa’s payment volumes and earnings. The company also assumes very little risk, as Citigroup will issue the cards and collect the payments.
In addition, Texas-based banking firm USAA is ending its 30-year relationship with MasterCard (New York symbol MA) in favour of a new alliance with Visa. In 2014, USAA customers purchased more than $26 billion worth of goods and services on their MasterCard credit and debit cards.
High p/e reflects strong prospects
Visa gets around 45% of its revenue from outside of the U.S., and the high U.S. dollar is hurting the contribution from its overseas businesses.
Even so, its fiscal 2015 earnings probably improved to $2.95 a share, and the stock trades at 26.8 times that forecast. That’s high, but it’s still acceptable in light of Visa’s high market share, strong global growth prospects and well-known brand.
The company also recently raised its quarterly dividend by 16.7%, to $0.14 a share from $0.12. The new annual rate of $0.56 yields 0.7%.
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