Income Gains Outweigh Drop in Visa Debit Card Share
Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Visa, Inc. (NYSE: V), provider of credit and debit card services under the "VISA" trademark, announced last week that its quarter ending on June 30, 2012 saw a per share net income of $1.56, up over 20% from the same quarter last year. Market analysts had predicted only a $1.45 net income per share for the quarter. V attributed the increased income to several factors that outweighed a significant loss experienced by the company in debit card processing. [It must be noted, however, that V would have had a $1.84 billion loss for the quarter if a settlement agreed upon, but not yet court-approved, is included. The settlement is related to a lawsuit filed against V and Mastercard, Inc. (NYSE: MA) seven years ago over the fees charged to consumers by card users. The settlement is expected to be approved by a U.S. federal court in September.]
V has stated that the biggest factors in its increased net income are the larger volume of electronic, card-related payments in the United States, a significant growth in processed card transactions in countries outside the U.S., and an increase in cross-border transaction fees. These are fees charged by VISA to banks on credit or debit card transactions which involve a consumer and a retailer that are in different countries; this could include a consumer making a purchase while traveling in a foreign country or paying for a good or service provided by a retailer in another country.
Analysts estimate that cross-border transaction fees account for 20% of V's stock value, and note that these fees increased by 14% for V over the same period in 2011. V also expects a further significant increase in these fees for the current quarter, which includes July and August, due to V's sponsorship of the Olympic Games. The company has historically experienced large growth in its cross-border transaction fees in those quarters during which the Olympics have taken place. V has been a sponsor of the 13 editions of the games. It negotiated agreements with over 1,000 financial institutions and merchants throughout the world prior to the London games, an increase of 70% over its agreements during the Beijing games of 2008. The increased fees are directly attributable to increased merchandise and tourism sales related to the Olympics.
V has also put a significant effort into increasing the number of transactions using its cards in the global market. The company has recognized that the percentage of cash and check transactions initiated by consumers outside the United States can be quite significant—as much as 80% of all consumer transactions in Russia, for example, use only cash or checks, and that number is also very high in the Middle East. V is taking active measures to exploit these markets. In Russia, V convinced the nation's largest grocery retailer, Mutney, only this year to take the VISA card for the first time. Mutney operates over 5,000 grocery stores throughout Russia. V also launched this year its first Shariah compliant credit card products in order to help increase card-related transactions in the Middle East and other Muslim countries. The company expects to see continued growth in its card transaction markets in these and other international markets. V's CEO Joseph Saunders has stated that the company expects to derive at least 50% of its profits from countries outside the U.S. by 2015; that figure is currently at 44% for the company.
The major negative effecting V's bottom line this year has been a 9% decrease in the number of debit card transactions processed by the company. The Durbin Amendment to the Dodd-Frank Bill—which was passed by the United States Congress in 2011, requires banks with $10 billion or more in assets to process debit and credit transactions over separate networks. Only MA had such a system in place prior to the Durbin Amendment. This caused a significant amount of the debit card processing market to shift from V and other debit card providers, such as Discover Financial Services (NYSE: DFS) and American Express (NYSE: AXP), to MA. However, this shift is expected to be only temporary as V, DFS, AXP, and others work to bring their processing networks into compliance with the Durbin Amendment and thereby retrieve market share from MA.
Two of V's major competitors—MA and AXP—have also experienced significant growth in the international electronic payment processing market during this year, although at a somewhat slower rate of growth. DFS has also seen its international processing card transaction fees increase, primarily through its Diners Club card, which is accepted in over 180 countries.
I find V's stock to be attractive for investors who seek both increased value and increased income in both the short and long term. The company's settlement payment in the lawsuit brought by retailers will be a one-time event that will be over within the next two to three months, and the use of VISA cards in debit transactions is expected to return to former levels as the company installs a transaction processing system that is compliant with the Durbin Amendment. These two issues are more than offset by V's determination to increase its market share in the international payment transaction market. The investor should seek to increase his or her holdings in V.
muhammadbazil has no positions in the stocks mentioned above. The Motley Fool owns shares of MasterCard and has the following options: short OCT 2012 $55.00 puts on American Express Company, short OCT 2012 $60.00 calls on American Express Company, and long OCT 2012 $65.00 calls on American Express Company. Motley Fool newsletter services recommend American Express Company 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.If you have questions about this post or the Fool’s blog network, click here for information.