Will Visa Shine Or Slip On Head Winds Minus Eurozone?
Card firms have been dealing with plenty of head winds: federal regulations, eurozone woes, negative foreign currency translations and a slowdown in consumer spending.
On Wednesday after the market's close, Visa will be the first to report how well it did or didn't do in the June-ending quarter. MasterCard will follow next week.
UnlikeAmerican Express ( AXP ) and bank card issuers, Visa and MasterCard don't take on credit risk. They process transactions over their networks.
They depend a lot on purchase volume to stoke their growth.
American Express said last week that second-quarter global spending on its credit cards grew slower than in recent quarters. But spending was still up about 7% over the prior year.
"They're up against some tough comparables from last year. Everybody had strong growth last year," said Nomura Securities analyst Bill Carcache. "In addition to that, there is a slowing macro environment."
According to Thomson Reuters, analysts expect Visa's profit in the three months ended in June, its third fiscal quarter, to rise 15% vs. a year ago to $1.45 a share. That would be the slowest growth in several quarters.
They see full-year profit growing 21% to $6.06 a share, on the high end of management's guidance.
Visa doesn't have to worry so much about Europe since Visa Europe is a separate company under terms of an agreement worked out prior to Visa's IPO in 2008.
"For MasterCard, Europe is around 25% of revenue, and for Visa it's virtually nothing," said analyst David Koning of Robert W. Baird & Co.
Analysts say one reason Visa's stock has done better than MasterCard's this year is because it has less exposure to Europe. But MasterCard posted relatively strong growth in Europe in the first three months, not withstanding weakness in the southern countries.
The strengthening U.S. dollar has a downside. When translated back into U.S. dollars, spending in other currencies means slower revenue growth since the card companies report in U.S. dollars.
"MasterCard's revenue will be hit more than Visa's this quarter by a stronger dollar," said analyst Bob Napoli of William Blair & Co.
MasterCard derives more than 60% of its revenue from international markets. Visa takes in more than 50% of its volumes in the U.S. It's close to its 2015 goal of boosting international revenue to at least 50% of its total.
Visa's credit business, said Carcache, "has been great," driven in part by affluent consumers. But it likely slowed in the last quarter, he says.
In the U.S., Visa's market-leading debit business has taken a hit as a result of new routing regulations effective April 1, which prohibit network exclusivity in PIN-debit issuance.
William Blair & Co. estimates that Visa's debit volume fell 12% in April and 8% in May vs. a year ago.
But Napoli figures the impact on revenue will be more restrained due to lower yields from debit. U.S. debit makes up 30% of Visa's total purchase volume but only about 20% of total revenue, he has estimated.
And Visa's debit business should reaccelerate as it begins to win back share due to new pricing schemes that make it cheaper for merchants to use Visa, Koning says.
The Department of Justice is looking into Visa's competitive responses to debit and merchant fee regulations, but Carcache, for one, doesn't think the probe will come to much.
A long-running merchants' class-action lawsuit over credit-card swipe fees was settled recently with Visa, MasterCard and large U.S. banks agreeing to pay about $7 billion. ButWal-Mart ( WMT ) this week called on merchants to reject the proposal because it doesn't go far enough in addressing structural issues and "hidden" swipe fees.
Visa, the world's biggest payments network, said its share would be about $4.4 billion. It had already set aside funds to cover most of the costs.
The agreement calls for a temporary cut in merchants' rates and allows merchants to charge customers a surcharge on purchases.
But surcharges are prohibited in 10 states. Analysts don't expect the new surcharge rules to have too much impact on purchase volumes.
"The key question for merchants is going to be, do they want to risk potentially frustrating consumers at the point of sale and risk losing a sale?" said Carcache. "Merchants may actually be more inclined to use it as bargaining tool with Visa and MasterCard. Now, they'll have the power to say if you increase interchange, we'll surcharge the heck out of customers."
Meanwhile, Visa is working to gain relevance in e-commerce and mobile payments.
Visa's new Visa.me pilot shows promise, analysts say. Now offered at five online retailers, including Buy.com, it lets V.me account holders make online payments with any major card using a mobile phone, computer or tablet.
Similar toeBay's ( EBAY ) fast-growing PayPal online payments system, users need only enter their email address and password at checkout.
"It addresses the PayPal threat," said Carcache, "to the extent Pay-Pal is taking business from them."
When V.me expands beyond the pilot, it'll have a good start since over 400,000 online merchants from Visa's earlier acquisition of CyberSource will be able to use the program right away, Carcache says.
But new initiatives like that are seen as longer-term growth drivers.
For now, investors are worried about the global economy and spending slowdowns.
Carcache says they might take some comfort in knowing that Visa and MasterCard spending volumes typically are 5% to 6% higher than global GDP growth.
Even during 2009, when global growth was slightly negative, the card companies posted positive volume growth, though barely.
"The first question I get in meetings with investors is, what's going to happen if there is another recession?" Carcache said. "They are not immune to recession. But I believe they will be relative outperformers."
That's because migration from paper to electronic forms of payments "is a strong secular tail wind and that's not changing."
About 85% of the world's transactions are still in cash, he says.
"The opportunity for growth is so large without killing each other over market share. The loser ends up being cash," Carcache said.