Is There Anything To Admire In Visa Inc (NYSE:V)?
- Visa to spend nearly $3.5 billion to repurchase shares
- Visa Europe acquisition to be accretive to EPS long-term.
- International market contributes 45% of Visa’s total revenue, and that is set to increase.
It is common knowledge that legacy payments processors such as Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) no longer are having it easy. The rise of alternative services such as PayPal Holdings Inc (NASDAQ:PYPL) and similar Internet-based payment solutions are seen as limiting growth opportunities for Visa and its ilk. Has Visa gone past its priume or is there something more that investors can love in the company?
Visa Inc (NYSE:V) is aware of the challenges in its industry and the company has been trying to fight back, but with mixed results so far. This Visa analysis article looks at the efforts the company is making and what can be expected from such efforts. The article also looks at the threats that could complicate the future for the company.
Visa Europe acquisition
What’s happening? Visa is in the process of closing the $18 billion cash and stock acquisition of Visa Europe. The company is raising debt of $16 billion to fund the cash component of the acquisition and use the rest of the balance to repurchase shares. The cash component of the transaction is $12.5 billion. Visa intends to use about $3.5 billion of the $16 billion debt to buy back some of its shares so that it can reduce the dilutive impact resulting from the stock component of the Visa Europe transaction.
Why Visa Europe? The acquisition of Visa Europe is expected to be accretive to earnings and revenues over the long-term. Visa also stands to benefit from the networks that Visa Europe has built with consumers and financial institutions in Europe, thus allowing it the opportunity to cross-sell the customers where possible. As such, Visa is hoping to open up new growth opportunities through the acquisition of Visa Europe. The acquisition of Visa Europe acquisition is also expected to bring some costs synergies especially as duplicated expenses are streamlined, thus allowing for EPS improvement.
It is worth noting that the management of Visa doesn’t expect Visa Europe to be accretive to EPS in the near-term.
Limited card competition
Visa Inc (NYSE:V) is the leading card payments processor in the world with nearly 2.6 billion branded cards in circulation and a network of more than 30 million merchants globally. Over the years, Visa has invested in building its brand and deepening ties with partners. In the recent times, security has come to define payments processing business with merchants and consumers tending to remain in the fold of reputable brands such as Visa and Mastercard. The result is that barriers to entry have been raised for newcomers to card payments business, which in effect limits competition for Visa in the legacy card payment processing market.
Driving secular shift from cash/check to cards
Penetration of card payment is still limited in many places around the globe. However, card payment has in the recent times appeared to gain share of the transaction market at the expense of cash and checks. The security and convenience of carrying a card are some of the benefits driving defection from cash and check payments.
Visa Inc (NYSE:V) is working to ensure those who are getting payment cards for the first time are joining its network. The company is touting its global availability and large merchant support. The limited card penetration and the increasing awareness of the benefits of card payments bode well for Visa’s legacy business.
Visa is making efforts to recruit more customers and partners in the international market, especially in the emerging economies where cash and check payments are still ubiquitous. Overseas, Visa is both looking to grow and diversify its revenue base. A diversified revenue stream provides the company with a better opportunity to mitigate the impact of competition.
Visa presently generates 55% of its revenue in the domestic market (the U.S.) and the rest at 45% from abroad. As the domestic market matures, Visa is looking overseas for more growth.
The resiliency of Visa Inc (NYSE:V)’s business is partly built on the ability of the management to trim costs. Because the company’s processing expenses are fixed, improvement in the administration of the larger variable costs such as advertising and personnel should boost profits.
Visa generates nearly 20% to 30% of its consolidated revenue from transaction taking place outside the country in which a card was issued. Such as called cross-border transactions and they usually characterized by higher margins than transaction taking place in the country of card issue.Because of its global support and large partner network, Visa provides an expanded opportunity for international travelers to buy and pay for items abroad.
Globalization and recently falling oil prices are trends that should drive cross-border transactions as people travel more frequently.
Threat of emerging technologies
As much as Visa can celebrate that it has secured legacy card payments market, partly because of prohibitive barriers to entry, alternative payment systems are existential threat. For example, PayPal is providing people with a simplified payment solution that comes at competitive costs to what Visa and Mastercard offer.
There is risk of Visa shedding some share of the paperless payments market as alternative digital payments gain in popularity, especially among consumers. Things aren’t made better by the fact that PayPal is expanding into the nearly $2.6 trillion consumer credit market.
Visa is trying to fight back against the threat posed by emerging technologies, but the battle and be long and costly. That creates a cloud of uncertainty that may scare investors.
Visa Inc (NYSE:V)’s payments processing business depends on the strength of the economy, primarily because the company takes a cut from the transactions that it supports. As such, if consumer spending slows and people also keep away from credit, Visa’s core business suffers.
The uncertainty of the global economic healthy is a cause for concern among Visa investors. Hopefully, the company can mitigate the challenge by taking advantage of the shift from cash/checks to cards.
Because of tightening regulatory framework and other factors, the global financial industry has been on a consolidation mode. Sometimes consolidation can come with benefits for Visa, but other times it can lead to a loss of business. Take a case where the consolidated financial institution shifts its card processing away from Visa to a rival provider. As such, there is more risk in consolidation than status quo for Visa, because you never know what the change might bring.
Unfavorable forex terms
Visa Inc (NYSE:V) is greatly exposed to the global market, which makes it susceptible to unfavorable foreign exchange movements given that its reporting currency is U.S. dollar. A stronger U.S. dollar against foreign currencies can result is significant topline headwind for Visa with the impact also being felt on the bottom line.
They say that knowledge of the problem is half the solution. Because Visa Inc (NYSE:V) knows what is threatening its future, you can hope that the management will tackle the challenges successfully. Looking at the company’s F2016 guidance, you see a largely optimistic management team.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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