On Dec 23, we reiterated our recommendation on Visa Inc. (V) to Neutral based on its stable core electronic payment business growth and capital strength. However, intense competition and higher expenses augment the operational risks.
Why the Retention?
Estimates for Visa have moderated since the company reported its fiscal fourth-quarter and full-year 2013 results on Oct 30. The company’s earnings per share of $1.85 were in line with the Zacks Consensus Estimate, although revenues of $8.3 billion missed the same benchmark by 1.7%.
However, the top and the bottom line surpassed the year-ago results by 8.9% and 20.1%, respectively, based on growth in card spending and strong performance across all segments. Meanwhile total expenses remained stable at 1% growth, resulting in improved operating margin of 58.9% from 55.7% in the year-ago period.
Nonetheless, Visa achieved its financial targets for full-year of fiscal 2013. However, litigation settlement expenses of about $4.0 billion deteriorated net operating cash flow to $3.02 billion in fiscal 2013 against $5.0 billion in fiscal 2012.
Following the release of the fourth-quarter results, the Zacks Consensus Estimate for fiscal 2014 slipped 0.3% to $8.86 in the last 60 days. Moreover, estimates for fiscal 2015 were pegged at $10.32 per share, down 0.9% over the same period. Nonetheless, on a year-over-year basis, earnings are projected to grow 18.5% in fiscal 2014 and 16.4% in fiscal 2015.
Overall, with the Zacks Consensus Estimate for both fiscal 2014 and 2015 showing no clear directional pressure on the stock in the near term, the company now has a Zacks Rank #3 (Hold).
Visa’s growth is sustained by its consistent healthy product boutique and huge network expanse. Higher travel spend, expanded digital commerce efficiencies through strategic acquisitions, alliances and technical upgrades bode well for long-term growth. The annual dividend hike and expanded share buyback amid no long-term debt also elucidate the capital adequacy of Visa, thereby retaining confidence among investors.
However, management guidance of 11–13% top-line growth, operating margin in about the low-60% range and bottom-line growth in mid-to-high teen range for fiscal 2014 reflect the challenges that Visa projects from regulations, litigations and operations.
Other Financial Stocks That Warrant a Look
While we maintain a neutral stance on Visa in the near term, better-ranked stocks in the electronic payment sector include Heartland Payment System Inc. (HPY), Higher One Holdings Inc. (ONE) and MasterCard Inc. (MA). All these stocks carry a Zacks Rank #2 (Buy).