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Visa's Huge Scale Gives It Edge In Face Of Headwinds

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T he law of large numbers doesn't seem to apply to global card processing giant Visa -- the principle being that big companies that have been around a long time can't maintain growth and stock price appreciation forever.

Visa ( V ) stock has gained 21% since the end of 2013, the best performer on the Dow . (On Thursday, Visa began trading on a 4-for-1 stock split-adjusted basis.) Earnings have consistently climbed by double-digit percentages.

"In network land, being big is a huge asset," said Moshe Orenbuch, an analyst with Credit Suisse. "Being everywhere is part of what makes a network successful. You're talking about a very large market, and Visa has the dominant market share."

Its vast network connects thousands of financial institutions with millions of merchants and cardholders every day.

Mid-Century Modernizer

Visa traces its roots to 1958, whenBank of America ( BAC ) launched the first consumer credit card program to middle-class consumers and small-to-midsize merchants in the U.S. Visa-branded cards appeared in the 1970s, around when the VisaNet electronic payments system launched worldwide.

After a restructuring in 2007, Visa went public in March 2008, one of the largest and most successful IPOs at the time. Visa's Western European operation wasn't part of it. Visa Europe is a separate company owned by member banks. If Visa ever reaches a deal with the banks to acquire Visa Europe, as it would like, it "could be a kicker down the road," Orenbuch said.

Scale has big advantages as Visa keeps adding new customers to its network in the worldwide shift from cash and checks to electronic payments. Top rivalMasterCard ( MA ) benefits from that secular trend too.

"Both have good margins," said Orenbuch, "but Visa's is even larger than MasterCard's because of its large size -- its scale."

In its fiscal 2015 first quarter, ended in December, VisaNet processed 17.6 billion transactions, up 10% year over year. Payment volume hit $1.2 trillion, up 11%.

Earnings per share rose 15% to $2.53. Despite a Q2 that will come up against an unusual tax benefit from the same quarter a year ago, full-year earnings are seen growing 14%, according to Thomson Reuters' poll of analysts. The biggest gains are expected in Q3 and Q4.

Visa has no debt and has been active in share buybacks, 3.1 million shares in the December quarter, plus 2.5 million through Jan. 27.

In the U.S., Visa also has benefited from its "better partnerships" with big banks such asJPMorgan Chase ( JPM ), Bank of America andWells Fargo ( WFC ), especially during bank consolidations that occurred several years ago, Orenbuch says.

For example, Visa snagged Washington Mutual's card business after the bank's assets were acquired by JPMorgan Chase in 2008. JPMorgan has since formed a more exclusive relationship with Visa.

Citigroup 's (C) close MasterCard ties didn't bring as many benefits for MasterCard, Orenbuch says. "Citigroup has not been a winner in consolidations and as a bank Citigroup in the U.S. is not that large," he said.

Costco Wholesale (COST), the giant warehouse club, on March 2 chose Citigroup as its exclusive card issuer and Visa over MasterCard as the card processing network, replacingAmerican Express (AXP).

Visa and MasterCard had both fought for Costco. The deal goes into effect April 1, 2016.

Checking Out Costco Deal

Analysts say that Costco's decision was a big win for Visa. After the announcement, investors sent Visa stock up 2.6% to a new high.

Credit Suisse estimates the Costco deal will add roughly $100 billion in annualized purchase volume to Visa in fiscal 2016, a rise of 1.2%. Morgan Stanley estimates 5-16 cents in added annualized EPS.

Visa sees revenue this year growing by low double digit percentages and earnings in the mid-teens. That growth is coming off a huge revenue base of nearly $13 billion in fiscal 2014 -- and in the face of several macro-economic headwinds.

The stronger dollar has reduced travel into the U.S. from such regions as Europe, Canada and Brazil, and lower gas prices have cut into U.S. payment volume.

As CEO Charles Scharf pointed out in the firm's last conference call at the end of January, "consumer spend continues at reasonable levels but is not accelerating."

Visa's "performing well despite the relative soft global economy and foreign currency headwinds," said analyst Bob Napoli of William Blair.

"Secular growth of electronic payments is powering through relatively soft global economic conditions," he told IBD. "Eighty-five percent of global transactions are still cash and checks, so there is still this massive opportunity to convert cash to electronic payments."

Visa has defied doomsayer fears that regulations and better payment processing mousetraps from tech companies such asApple (AAPL) and others would weigh on its business, as well as MasterCard, Napoli says.

"Everybody was concerned Apple Pay would hurt Visa and MasterCard, and instead it became a partner," he said, letting Apple Pay "run on the rails" those networks built.

Not to be left behind by the tech revolution, Visa has invested heavily in digital payments, such as Visa Checkout (formerly V.Me).

Visa Checkout makes it easier for consumers to pay with cards online on any device and continues to expand to new markets. Visa says that will be in 16 markets this year.

Visa will also likely get a boost from price hikes. With October's Q4 fiscal 2014 earnings, Visa said it would raise prices on certain fees to U.S. card acquirers starting this April, the first such pricing action in four years. Shares shot up 10%.

MasterCard hiked fees in 2013, but Visa didn't follow. William Blair analysts estimate that Visa's new pricing action will add 2-3 percentage points to revenue growth. Visa has said the price hike would contribute to stepped-up revenue growth in this year's second half.

Credit-card spending has been growing faster than debit, viewed as a positive for the card networks because credit is more profitable.

Nomura analyst Bill Carcache notes that Visa and MasterCard are "big winners" in card issuers' battle for transactions, and that issuers are rolling out expensive rewards programs and shifting focus to higher-spending prime customers.

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


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

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