Bet on e-Commerce & NFC With a Credit Card
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In Q4 FY 2012, Visa (NYSE: V) reported GAAP net income of $1.7 billion or $2.48 per share. For the full FY, Visa reported GAAP net income of $2.1 billion or $3.17 per share, which is down by 38.8% from the previous year EPS of $5.18. Visa’s decline is the result of its recent lawsuit settlement with retailers. Back in July, Visa, MasterCard (NYSE: MA), and some big banks settled a lawsuit with retailers over price fixing of swipe fees. In the settlement, Visa agreed to pay $4.4 billion and MasterCard agreed to pay $790 million. In addition, Visa and MasterCard agreed to lower their fees for eight months and let retailers charge consumers extra for using a credit card. For FY 2012, Visa booked a litigation provision of $4.1 billion. Adding back the provision and other special items, Visa posted non-GAAP diluted EPS of $6.20, which is up by 24% from the previous year non-GAAP diluted EPS of $4.99. Over the past five years, Visa has a compound annual growth rate (CAGR) of 23.76% in revenue.
Litigation expenses have hit Visa before. In 2007, Visa settled an antitrust lawsuit by agreeing to pay American Express (NYSE: AXP) $2.1 billion. In 2008, Visa settled an antitrust suit with Discover Financial Services (NYSE: DFS) and agreed to pay the company $1.89 billion. These lawsuits have added an unpredictable factor to Visa. Already, the preliminarily approved July settlement is being appealed by a group of merchants. The merchants disagree with a part of the order that prevents them from suing Visa and MasterCard in the future over swipe fees. If that part of the settlement is removed, Visa could continue to face lawsuits. However, these lawsuits cloud the long-term value of Visa.
Currently, the credit card industry has a huge opportunity in e-commerce. During Thanksgiving weekend, from Black Friday to Monday, Visa reported that consumers spent a record $5 billion while shopping online. In Visa’s press release, Visa’s Chief Economist Wayne Best stated, "CyberMonday was a true star this year, generating a record $2 billion purchase volume on Visa cards issued in the U.S., an increase of 21% over last year." The growth of e-commerce is huge for credit card companies because e-commerce requires digital payment. In other words, people do not pay with cash. Visa is promoting e-commerce through a service called V.me. V.me allows people to store Visa, MasterCard, Discover, and American Express credit cards in their V.me account and make online purchases without sharing their full card account information to the seller.
Furthermore, this growth opportunity is not just limited to online purchases. Smartphones and tablets have provided a mobile payment market for credit card companies. Instead of paying with a plastic credit card at the counter, consumers can pay with their smartphone or tablet. Google (NASDAQ: GOOG), which dominates the smartphone market with its Android OS, is a big proponent of NFC and mobile payment. Google Wallet allows consumers to store their credit card information on their phone and make payments using NFC. Instead of swiping a plastic card to make a payment, consumers can just tap their phone or tablet on an NFC terminal.
The benefits to credit card companies are huge. Visa, MasterCard, Discover, and American Express generate revenue on transactions that occur on their network. The convenience of online shopping and NFC provide more ways for consumers to pay on credit. This means that as e-commerce and NFC adoption increase, the number of payments that get processed on their payment networks should also increase, which in turn should increase the companies’ revenues.
Looking at valuation and using non-GAAP EPS, Visa currently has a trailing PE ratio of 23.8 and a five year CAGR of 23.76%. While a non-GAAP PE ratio of 23.8 is not cheap, Visa is growing and operates the largest retail electronic payments network in the world. In addition, Visa has a tangible book value per share of $6.77. Tangible book value is the same as book value except it ignores intangible assets like goodwill. This can be considered as a (minor) discount to the investment cost because it is equity already owned by Visa. Overall, Visa's growth and the ongoing rise of e-commerce makes the company a good long-term investment. However, the approaching fiscal cliff is a big question mark. Thus, investors should dollar cost average into Visa to minimize risk.
iamgreatness has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and MasterCard. Motley Fool newsletter services recommend American Express Company, Google, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!