Why Money Card Giant Visa Is Still A Growth Stock


Can a 50-year-old brand with annual revenue of more than $10 billion and a market cap of $79 billion still be a growth company?

In the case ofVisa Inc. ( V ), the answer is yes. Since Visa went public in 2008, revenue has grown 14% on a compounded annual basis as consumers around the world continued to move from cash to plastic.

The world's largest processor of card transactions, San Francisco-based Visa leverages its global payments platform to drive even faster growth on the bottom line.

Since the IPO, earnings have grown at a compounded annual rate of 30%, though growth is expected to slow to just below 20% the next few years as Visa invests to keep customers and win new ones.

Visa ranks high in the IBD50 list of growth stocks along with small-cap stocks such asSturm Ruger ( RGR ) and3D Systems ( DDD ).

There is a lot more shifting to come from cash to plastic and beyond to keep Visa in growth mode, Visa's management says.

"At the time we went public, there was $11 trillion to $12 trillion of cash globally," said Chief Financial Officer Byron Pollitt in a recent interview. "Today there is $13 trillion. So the growth runway we have before us is even longer today."

The next leg of growth will come under the helm of new CEO Charles Scharf, a former head ofJPMorgan Chase 's ( JPM ) retail arm. He took over from soon-to-retire Joseph Saunders, who led Visa through its IPO and a thicket of U.S. regulations over the last year, which impacted its industry-leading debit business.

International Growth

A lot of new growth will likely come from outside the U.S., where card spending is growing faster than in the more mature U.S. card market.

Think of the card processing business as a toll road, says Nomura Securities analyst Bill Carcache.

"The toll road has been built, and you drive incremental volume over that toll road," he said. "For every additional dollar of revenue that comes in for Visa, essentially 90 cents is gross operating income."

For smallerMasterCard ( MA ), it is 80 cents of each incremental dollar, he says.

"It's more expensive for MasterCard to drive the kind of volume growth relative to Visa," Carcache said.

Visa's operating margin was 60% in its September-ending fiscal year. Carcache expects MasterCard's to come in at 53% this year.

Pollitt says Visa's operating margin should be better than MasterCard's because of its larger scale. He said, "We do not manage to a margin. Margins are an outcome. We are a cash-flow-based company."

Visa has returned a good deal of that excess cash to investors in the form of share buybacks and dividends, the latter of which have gone from 42 cents a year in 2008 to $1.32 in 2012.

U.S. financial-reform legislation caused Visa to lose debit share to MasterCard over the last year. But it's been able to stem some debit-share losses through rebates and incentives to merchants, as well as various pricing schemes.

"If anything, they haven't lost as much as many people thought," said Zilvinas Bareisis, senior analyst with consultancy firm Celent.

Credit card spending has been a bright spot for Visa. In the last quarter, its credit volume jumped 9.2% over the prior year, while U.S. debit volume fell 6.6%.

Pollitt says affluent cardholders have been a boon to Visa's credit card business because they tend to pay off their balances, freeing them to make more purchases.

"The profitability of a card to Visa is a function of how often it's used," Pollitt reminded.

Carcache offers another theory supporting Visa's strong credit-card business. The company "has the good fortune to be partnered with issuers who are seeing strong volume growth," he said.

He points in particular to Visa's top bank issuer, JPMorgan Chase, which posted a 10.7% gain in overall U.S. purchase volume in Q3, following a 12.3% gain in Q2.

In contrast, he says,Citigroup (C) is MasterCard's top issuer and its overall U.S. card volume was down 0.5% in Q3, after no growth in Q2.

Meanwhile, 47% of Visa's revenue currently comes from outside the U.S. Visa wants that number to reach 50% by 2015.

"In order to make that happen, we have launched accelerated growth strategies in a multitude of countries throughout the globe," Pollitt said.

"The vast majority (of non-cash-paying consumers) are using plastic cards, but the fastest-growing form factor in our ecosystem is the mobile phone," Pollitt said.

Online Solution

Visa's key new program to address online commerce, using mobile phones especially, is V.me, a digital wallet that makes online shopping a snap.

The program just launched in the U.S., but Visa expects to start rolling it out in global markets next year, including Brazil, Visa's second-largest market after the U.S.

Visa Europe recently announced V.me launches in Spain, France and the U.K. Though Visa Europe is a separate operating entity (to many investors' delight because of Euro woes), the European rollout of V.me matters, Pollitt says.

"The more broadly V.me is adopted, the more you create the network effect," he said. In other words, as adoption expands, more banks and merchants are apt to hop on the bandwagon.

In V.me's U.S. launch,Bank of America (BAC),PNC (PNC) andU.S. Bancorp 's (USB) US Bank are among more than 50 banks that have agreed to offer V.me to its online banking customers.

"Bank of America is a big win," Carcache said.

And 25 merchant partners are signed on, including1-800-Flowers.com (FLWS),Blue Nile (NILE), Buy.com and MovieTickets.com.

Visa still lacks big-name retailers. Pollitt says Visa is in negotiations with them. "They are to come," he said. "This is still very early days."

"The real test will be how merchants and consumers adopt (V.me)," said Celent's Bareisis.

Online spending on U.S.-issued Visa cards topped $5 billion over the Thanksgiving weekend.

On Cyber Monday alone, a record $2 billion was spent on Visa credit and debit cards issued in the U.S., a 21% jump over last year's same time.

"The real call-out of Thanksgiving was the superb performance of online," Pollitt said.

But questions remain, including resolution of the fiscal cliff in the U.S. and the kind of economic recovery that will take place over the next year, he says.

Visa's guidance for 2013 calls for revenue growth in the low teens and earnings growth in the high teens.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: DDD , JPM , MA , RGR , V

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