On Sep 18, we issued an updated research report on Visa Inc. ( V ). Higher competition, stringent regulations and the possibility of adverse outcomes of the ongoing litigations raise both operational and financial risks for the company. Nevertheless, a strong network of merchants and updated technology should drive growth.
Moreover, given the recent verdict in European Union (EU) and stringencies in Russia, Visa and its peer MasterCard Inc. ( MA ) will be compelled to offer concessions on cross-border card transactions.
Additionally, the EU's ruling has reinitiated Britain's Competition and Markets Authority's scrutiny for the domestic card payment fees charged by Visa and peers on the retailers who now demand reduction in domestic interbank rates to be at par with the new cross-border card fees. A final decision is expected by Oct 2014, slapping the company with more charges and rebates. Notably, in the first half of fiscal 2014, Visa also shelled out $194 million to settle a lawsuit.
These risks have also been addressed by Visa, which deposited $450 million in its litigation escrow account earlier this month.Thiscould have otherwise been used for exploiting growth opportunities or increasing shareholder value.
The company's top-line growth guidance of high single to low double digits, excluding a 2% reduction due to negative impact of foreign currency and bottom-line growth in high teen range in fiscal 2014, lower than 22% growth recorded in fiscal 2013 also reflect cautiousness.
Mobile Payments an Opportunity
The threat to card security amid the increasing number of cyber hacking cases keeps consumers away from mobile payments, an area of opportunity that the card networks are exploring proactively. In this regard, Visa's latest alliance with Apple ( AAPL ) Pay, along with the launch of digital token service and improved security measures further elucidate its focus on accentuating the efficiency of cards in electronic payments.
Meanwhile, core growth of Visa has been steady so far in fiscal 2014 despite difficult comps and currency fluctuations. This is reflected in its improved margins, debt-free balance sheet and strong cash flows, which also support efficient capital deployment, thus retaining shareholders' confidence. Given the growth potential of mobile payment industry in the next 3-5 years, we believe it will unlock incremental opportunities for Visa as well.
This Zacks Rank #3 (Hold) stock has delivered positive earnings surprises in 3 of the last 4 quarters with an average beat of 2.1%. The company's third-quarter fiscal 2014 (ended Jun 2014) earnings topped both the Zacks Consensus Estimate and the year-ago quarter number by 3.8% and 15.4%, respectively.
Overall, a balanced risk-reward profile in the near term has led to minor estimate revisions for 2014 and 2015. The Zacks Consensus Estimate for 2014 and 2015 dipped one and three cents to $8.97 and $10.35 a share, respectively, in the past 60 days. However, on a year-over-year basis, earnings are expected to grow by about 20% in 2014 and 15.4% in 2015.
Moreover, the Most Accurate estimate for Visa's 2014 and 2015 earnings currently stand at $9.05 and $10.60 a share, resulting in an Earnings ESP of +0.9% and +2.4%, respectively. This indicates a likely earnings beat for both the years.
Visa's long-term growth is pegged at 17.2%, way higher than peer group average of 11.9%.
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