Visa's Sturdy Capital Signals Growth, Regulations a Risk - Analyst Blog

Recently, we issued an updated research report on Visa Inc. (V), citing the opportunities and challenges that the company may face as it enters fiscal 2015. While difficult comps, litigation costs and regulatory compliance mar the desired upside, Visa's organic growth initiatives and technological upgrades to tap the high-potential digital payments market are expected to augur growth.

Over the past few years, Visa has explored new avenues for growth by investing in the rapidly growing digital processing and service platforms, while also reaching out to banked and unbanked consumers in emerging and developing economies, thereby gaining substantially from large-scale economies.

The company is also focused on developing key application programming interfaces and software development kits, while undertaking initiatives for technological upgrades and talent acquisition. A major shift toward cashless payments in the next 3–5 years will further accentuate the company's top line.

We believe Visa should be able to outperform its projection for fiscal 2015 through strict expense control and margin expansion. This was reflected by a mere 0.3% expense rise in fiscal 2014, which was tightened from an 8.5% increase in fiscal 2013 and 12% in 2012.

On the financial front too, Visa holds a strong position with a debt-free balance sheet and ongoing cost-cutting efforts. While controlled operating expenses drove core margins in fiscal 2014, a robust cash flow of whopping $7.21 billion in fiscal 2014, against $3.02 billion in 2013, and free cash flow of $5.77 billion (higher than the targeted $5 billion) haveaccelerated shareholder return with the new stock repurchase program worth $5 billion and a dividend hike of 20%.

Risks That Warrant Attention

Investment in growth initiatives have conversely weighed on capital expenditure, which was $553 million in fiscal 2014, higher than that of 2013. Financial risks from higher incentives, currency fluctuations and difficult comps from the prior years are also reflected in its top-line growth guidance in low double digits, and bottom-line growth in mid-teens range

in fiscal 2015, lower than 19% growth recorded in fiscal 2014 and 22% in fiscal 2013. Top-line growth also slowed down to 8.7% in fiscal 2014 from 13% in fiscal 2013.

Moreover, increased deposits into the litigation escrow account, the funds which otherwise could have been used for exploiting growth opportunities or adding shareholder value. Going ahead in 2015, final implementation of the regulations in the European Union (EU), Britain and Russia will most likely impose numerous costly compliance burdens on the company. These may also affect the cross-border transaction revenue source adversely.

Earnings Review

This Zacks Rank #3 (Hold) stock has delivered positive earnings surprises in all of the last four quarters with an average beat of 2.4%. The company's fourth-quarter fiscal 2014 (ended Sep 2014) earnings topped both the Zacks Consensus Estimate and the year-ago quarter number by 3.3% and 24.8%, respectively.

Overall, abalanced risk-reward profile in the near term has led to minor estimate revisions for 2015 and 2016. The Zacks Consensus Estimate for 2015 and 2016 moved north by 0.6% and 1.9% to $10.41 and $12.10 a share, respectively, in the past 60 days. However, on a year-over-year basis, earnings are expected to grow by about 14.8% in 2015 and 16.3% in 2016.

Visa's long-term growth is pegged at 17.2%, way higher than peer group average of 12.5%.

Key Picks in the Sector

Some better-ranked stocks in the financial sector include MasterCard Inc. (MA), Global Payments Inc. (GPN) and Western Union Co. (WU), all of which carry a Zacks Rank #2 (Buy).