Visa reported earnings of $0.78 for the quarter ending December 31. This beat consensus expectations which were expecting earnings of just $0.66. After the announcement, the stock rose 11.3% in just two days.
The rebound was good news for investors who had held the stock since the IPO in March of 2008. These investors had purchased the stock at a price of $44 which has turned out to be an area of support on the chart. In fact, this level was in danger of being broken in late January until a rebound in the market allowed the stock to re-take its IPO price.
Ironically, the primary reason that Visa beat estimates is not because revenue levels were high. In fact, US transaction revenue was actually flat with last year’s level. US credit card transaction volume was down about 6% and US debit card volume was up enough to net those losses out to roughly zero. The revenue growth came from international transaction volume, and the earnings beat actually came from significantly lower expenses.
Now, I have utmost respect for a company that is able to cut its expenses during a weakening market in order to operate profitably. However, the bottom line is that Visa is not immune to the global recession which is why management is dealing with expenses so aggressively. Advertising and marketing remained at $210 million for the quarter which is flat with the end of last year. This is not the type of action you would expect to see out of an aggressive growth company.
I’m actually a bit surprised that management is not increasing its marketing budget in order to capture market share and strengthen its competitive position. The fact that Visa has pulled back spending to this point is a testament to just how difficult this current environment really is.
Looking to the quarters ahead, management has reiterated their commitment to growing earnings by roughly 20%. At this point, it looks like that growth will be from cuts in expenses instead of due to actual revenue growth. This game can only be played for so long. Once excess expenses have been cut, management must make the decision to cut necessary projects, which end up affecting long-term revenue growth, or else abandoning the 20% earnings growth target. Neither of these choices will likely have a positive effect on the stock.
On a macro level, Fitch recently commented on credit card issuers stating that late payments on US cards topped record levels. Last month default levels rose sharply and Fitch expects the credit card Asset Backed Securities to worsen because of the delinquency rates. Investors in Visa and MasterCard will argue that this doesn’t matter because these companies simply process the transactions and do not have credit risk.
But credit risk eventually affects Visa because as banks deal with increasing credit risks, they will begin to issue fewer cards which means slower growth or even a decline in the transaction revenue. International markets are facing similar problems and while they may not be saturated to the point that the US markets are, the anticipated growth in international market is likely too optimistic.
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