Many of the restrictions that were in place during the worst phases of the Covid-19 pandemic have been at least partially lifted and the world has begun to return to normalcy, even in the U.S., despite the botched initial response.
With the number of Covid cases declining, consumers are becoming comfortable once again with doing many of the things that they weren’t able to do for most of last year, including traveling, eating at restaurants and attending sporting events. All of these activities require payment and the preferred way to pay, at least in the U.S., is by credit or debit card.
This is one reason why Visa Inc. (V, Financial), which is one of the top digital payment processors in the world, is one of my favorite companies in the market at the moment. Let’s look at the company’s recent quarter, catalysts for growth and valuation to see why I believe Visa is an excellent way to play the reopening.
Recent earnings highlights
Visa reported earnings results for its second quarter of fiscal year 2021 on April 27 (the company’s fiscal year ends Sept. 30). Revenue was down 2.6% from the prior year, but managed to top Wall Street analysts’ estimates by $1.40 million. Adjusted earnings per share of $1.38 was down 1 cent, or 0.7%, from the prior year, but this was 11 cents better than expected.
Much of the revenue decrease was attributed to a 19% decrease in international transactional revenues. Total payment volumes at constant currency were higher by 11% while total processed transactions grew 8%. Cross-border transactions remain challenged as volumes were down 11%.
Compared to 2019, payment volumes and process transactions were both higher by 16% as consumer spending has increased. Credit payments were higher by 2% compared to a 5% decrease in the first-quarter of the fiscal year. Debit volumes surged 26%, which was an acceleration from 17% growth in the first-quarter. Total cards in use increased 4.2% to 3.59 billion, showing that Visa retains its ability to attract new clients.
Visa is a very financially sound company. Total assets stood at $80.2 billion as of the end of the quarter, with current assets totaling $26.9 billion. Cash, cash equivalents and short-term investments was $18.6 billion. Visa has total liabilities of $42.5 billion, with current liabilities of $12.7 billion. The company has total debt of almost $21 billion, but has no maturing debt within the next year. Visa generated free cash flow of $3.17 billion in the quarter, bringing its year-to-date total to $6.52 billion.
The company also repurchased 8.3 million shares at an average price of just over $205. Visa had $9.9 billion, or 2% of its market capitalization, remaining on its current share repurchase authorization as of the end of the second-quarter.
Visa did not issue guidance for the remainder of the fiscal year given the uncertainty of the pandemic, but analysts surveyed by Yahoo Finance expect that the company will earn $5.61 per share in fiscal year 2021. Achieving this result would represent a 11.3% and a 3.1% increase from fiscal year 2020 and fiscal year 2019, respectively.
Takeaways
The top-line did decline year-over-year, but the most recent quarter was Visa’s best since the second-quarter of fiscal year 2020 for total revenues. The company has now seen three consecutive quarters of sequential revenue growth as it appears that Visa is far from the bottom in terms of revenue since the onset of the pandemic.
Monthly transactions in the U.S. showed robust strength as total credit and debit card transactions increased throughout the quarter and were at their highest levels in more than a year. This theme continued into the first three weeks of April as well. Total payment volumes also outpaced 2019 levels, a very positive sign.
Cross-border volumes, though down compared to the prior year, have greatly improved sequentially as well. Visa ended the quarter seeing its strongest three months of cross-border volumes since the start of the calendar year 2020. This metric is still below 2019 levels, but volumes have at least stabilized since February.
The operating environment within Europe continues to be difficult. This region is the primary driver of international transaction revenue, but was down 21% on a constant currency basis. Until growth returns, international transaction revenue will likely be a headwind for the company. A further reduction in travel restrictions coupled with higher vaccination rates would go a long way in seeing Europe turn into a positive, which would be a significant tailwind to results if this region were return to growth.
A return to pre-pandemic travel patterns would also benefit the company as nearly two-thirds of cross-border volumes pre-Covid were related to travel. Since early last year, travel has only accounted for approximately a third of cross-border volumes.
Visa should also continue to see benefit from e-commerce sales. Globally, card-not-present sales outside of travel were higher by more than 20% in the most recent quarter. Visa has outperformed this growth in many key areas, seeing at least a 30% average in card-not-present sales in key markets such as the U.S., Canada, the U.K, India and Brazil over the past three quarters. As with cross-border volumes, card-not-present volumes were at their best levels in April since before the pandemic.
Finally, the average savings rate has increased during the pandemic. The U.S. personal saving rate hit a record 32.2% in April while spending decreased almost 13%. While these percentages have normalized somewhat, they are still above average. As more restrictions are lifted, people are likely to spend more of their savings. And with cash usage hanging steady at just about one-fourth of total payments, consumers are much more likely to use credit and debit cards for purchases than cash. Given the company’s leadership position in digital payment, Visa should be able to snap back to growth much faster than many of its peers.
Valuation analysis
Visa’s lack of guidance for the fiscal year speaks to the notion that the company isn’t truly out of the woods with regards to Covid-19. It is a positive that analysts expect Visa to return to growth compared to 2019, even if the growth is smaller than shareholders of the company are used to.
With the stock trading at $233, Visa is trading with a forward price-earnings ratio of 41.5. Visa has traded with a premium multiple since going public in 2011, but not close to this level. The stock’s five- and 10-year average price-earnings ratios are 25.3 and 29.8, respectively.
That being said, analysts expect that earnings will be even better in fiscal year 2022. The average estimate for next year’s earnings is $7.04 per share, which would be a 25.5% improvement from this year’s expectations. The anticipated growth rate is even higher than Visa’s long-term pre-pandemic growth rate of 17.5%.
Using estimates for next fiscal year, Visa trades at 33.1 times earnings, much closer to its average valuation since 2016. With the higher than usual growth rates, this valuation appears much more reasonable in my view.
Final thoughts
Visa continues to fight through the pandemic, though sequential results continue to improve in many areas. Europe remains a weak spot, but Visa’s metrics in many other parts of is business are already above what was seen in the pre-pandemic results.
Shares of the company aren’t cheap even using fiscal year 2022 estimates and there is still a ways to go before Covid-19 isn’t an overhang on the economies of the world, but Visa is well positioned to take advantage of pent up consumer spending. The company also has several other growth levers to pull, such as in the area of e-commerce, that should allow Visa to come out of the pandemic in a much stronger business position. For these reasons, I believe Visa can still be bought even at today’s valuation.
Author disclosure: the author maintains a long position in Visa.
