CORE vs. PRGX: Which Stock Should Value Investors Buy Now?
It has been about a month since the last earnings report for Visa Inc. V. Shares have added about 8.8% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is V due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Visa Beats Q2 Earnings Estimates, Raises 2018 Guidance
Led by higher spending on its branded cards, Visa Inc. reported second-quarter fiscal 2018 (ended Mar 31, 2018) earnings of $1.11 per share, beating the Zacks Consensus Estimate by 9.9%. Also, the bottom line improved 30% year over year.
Results were driven by continued double-digit growth in payments volume, cross-border volume and processed transactions as a strong economy and a positive consumer sentiment led to higher spending.
Net operating revenues of $5.07 billion surpassed the Zacks Consensus Estimate of $4.77 billion. Also, revenues climbed 13% year over year. This upside was primarily driven by consistent growth in payments volume, cross-border volume and processed transactions.
On a constant dollar basis, payments volume growth for the fiscal second quarter improved 10.5% year over year to $1.99 trillion. Cross-border volume growth, on a constant dollar basis, was 11% in the quarter. Visa's processed transactions increased 12% over the prior year to 29.3 billion.
Service revenues increased 13% year over year to $2.3 billion on higher nominal payments volume recognized on payments volume in the prior quarter.
Notably, other revenue components are based on the reported quarter’s activity. Data processing revenues were up 15% on a year-over-year basis to $2.1 billion, while international transaction revenues grew 19% to $1.8 billion.
Other revenues increased 13% year over year to $230 million.
Client incentives of $1.3 billion increased 25% year over year and represented 20.3% of gross revenues in the reported quarter.
Adjusted operating expenses increased 18% year over year to $1.7 billion, primarily due to higher personnel and marketing expenses. Interest expense increased by 13.3% year over year to $153 million.
Exchange rate shifts from the prior year positively impacted earnings per share growth by approximately 1.5 percentage points.
Balance Sheet Strengthens
Cash, cash equivalents and available-for-sale investment securities were $14.2 billion as of Mar 31, 2018, up 74% from Dec 31, 2017.
Total assets were $69 billion as of Mar 31, 2018, up 1.6% from fiscal 2017, ended Sep 30, 2017.
In the fiscal second quarter, the company generated adjusted free cash flow of $2.6 billion.
Share Repurchase and Dividend Update
During the reported quarter, the company repurchased shares worth $2 billion. On Apr 17, 2018, the company declared a quarterly dividend of $0.2 per share, which will be paid on Jun 5, to its shareholders on record as of May 18.
Driven by strong results and a favorable outlook for the remainder of the year, Visa raised its 2018 guidance provided earlier.
The company expects annual net revenue growth in low double digits on a nominal basis, with approximately 1% of positive foreign currency impact.
This compares with the earlier estimate of high single digits revenue growth, with approximately 0.5 of favorable currency impact.
The high end of client incentives as a percentage of gross revenues has been lowered. It now expects the same in the range of 21.5 from the earlier range of 21.5% to 22.5%.
Visa estimates GAAP and effective tax rate of 21% to 22% down from earlier estimate of 23% from 29%, due to U.S tax reform
It expects annual operating expense increase in low double digits (versus the high end of mid-single digits as earlier) adjusted for special items in fiscal 2017.
The company projected earnings per share (EPS) growth of mid-60s (versus mid-50s earlier) on a GAAP nominal dollar basis and high-20s (high end of mid-20s) on an adjusted, non-GAAP basis (EPS includes approximately 1.5% of positive foreign currency impact and 9% to 10% of benefit from tax reform).
The guidance on annual operating margin of high 60s was kept unchanged.
During the fiscal second quarter, the company acquired Fraedom, a Software-as-a-Service technology company providing payments and transactions management solutions for financial institutions and their corporate customers. The deal will enhance Visa’s capabilities in the Business-to-Business payments industry.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There have been three revisions higher for the current quarter compared to seven lower.
Visa Inc. Price and Consensus
Visa Inc. Price and Consensus | Visa Inc. Quote
At this time, V has an average Growth Score of C. Its Momentum is doing a bit better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for momentum investors than growth investors.
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, V has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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