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Robert Stephens, CFA
Robert Stephens, CFA
Articles (42) 

Why Visa Could Keep Beating the S&P 500

Further outperformance of the main index could be ahead

September 12, 2018 | About:

A solid growth strategy has the potential to push Visa Inc.'s (NYSE:V) stock price higher over the medium term.

Most of the opportunity exists in global markets. The electronic payments company could see a profit boost in Europe with the integration of its recently acquired subsidiary, Visa Europe, moving along ahead of schedule. It also has a dominant position in India, with intriguing chances for further innovation in its products and services. Growth for the global economy appears likely as well, though a full-scale global trade war could mute it to some extent.

European potential

In the last year, Visa's stock price has risen 37%. That’s a significantly better performance than the S&P 500, which has gained 16% over the same period.

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European operations could act as a catalyst on its stock price over the medium term. The integration of Visa Europe, which provides the company's payments solutions to European businesses and consumers, is proceeding ahead of schedule following its $23 billion acquisition. The operation is expected to be accretive at double-digit levels in the current fiscal year, which is two years earlier than previously guided.

The company’s prospects in the region are set to be boosted by the gradual displacement of cash in the long run. Cash still accounts for a large portion of consumer spending in a number of major European economies. In Spain, Italy and Poland, for example, it accounts for 60% of total consumer spending. There may also be opportunities for the company to gain market share in specific European countries where its current business is relatively concentrated. It plans to target faster-growing markets as well as those in which it has a lower market share.

Visa may also be able to increase yields in Europe. It is focusing on higher-yielding consumer and commercial credit volumes. Previously, the company was debit-centric, with a focus on credit having the potential to deliver higher returns over the long run.

Improving prospects

Visa also has a strong growth opportunity in India. It is anticipating an increase in volumes over the medium term following a reduction in fees for debit transactions. With a market share of over 50%, the company has a dominant position in what remains a fast-growing market. It is seeking to improve the technology available in the country, with contactless transactions being introduced and the company anticipating significant growth in digital payments as the economy experiences a continued shift toward payment maturity.

The company may also be able to generate impressive growth from its Visa Direct opportunities. Visa has partnered with MoneyGram, a money transfer product, as it seeks to capitalize on the growth potential within the cross-border remittances market. It also signed a deal with OnDeck, which provides an instant funding feature for lines of credit for small businesses. Given the importance of cash flow management for small businesses, improved flexibility could prove to be a popular service offering. Visa Direct has also had a positive impact on the company’s core business, leading to increased spending per card, according to a recent study of debit card users in the U.S. As a result, the overall prospects for the business seem to be improving.

Potential threat

With Visa’s profitability being closely linked to consumer spending levels, the potential for a full-scale global trade war continues to be a risk facing the company. The International Monetary Fund estimated that if all of the tariffs that have been announced by the U.S., China and other countries are implemented as expected, the world gross domestic product could be 50 basis points lower in 2020 than it otherwise would be. With tariffs set to increase costs for consumers in a number of major economies, the growth in spending levels recorded over the medium term may come under a degree of pressure.

Despite the threat of a full-scale trade war, consumer confidence remains relatively high. For example, U.S. payments volume growth accelerated from 10% to 11% in the most recent quarter with strong debit spending and commercial volume growth. U.S. GDP growth is forecasted to be 3.5% in the third quarter, while China and Europe continue to offer promising future growth prospects. Since Visa is exposed to many world economies, weakness in one region may be offset by strong performance elsewhere. This may reduce its overall risk and cause investor sentiment to remain buoyant.

Verdict

Having outperformed the S&P 500 in the last year, Visa's stock price could offer stronger upside potential than the wider index over the medium term. It has significant growth potential in Europe and its dominant position in India could lead to long-term growth in one of the world’s largest emerging markets. Alongside innovative new features and Visa Direct, this could have a positive impact on its financial performance.

Although there are risks from a potential full-scale global trade war, the prospects for the world economy continue to be relatively bright. With a diverse business model, Visa appears to offer a favorable risk-reward opportunity.


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