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Visa – Consumers Still Swiping, Stock Still Soaring

Emerging market sales are red hot


If the economy slowed last quarter, it appears that Visa (NYSE:V) cardholders didn’t get the message.

The  company  announced  earnings  Wednesday  for  the  quarter  ended  September  30. Profits  were  up  14%  and  earnings  per  share — boosted  by  share  buybacks — were  up  20%. Not  bad  numbers  for  a  company  at  the  mercy  of  disgruntled  consumers.

After Thursday’s monster rally, Visa shares now sit near new 52-week highs.

Some relevant points to take away from the earnings release:

  • Worldwide, Visa processed 13 billion transactions during the quarter, up 9%  from last year. Debit card transactions were up 13%. Since V stock benefits from every swipe via interchange fees, this is great news.
  • 65% of revenue growth came from outside the United States, and total revenue from abroad amounted to 45% of the company’s total—most of this from fast-growing emerging markets.
  • As a result of the Dodd-Frank Durbin Amendment and its effects on debit card issuance, most of Visa’s domestic growth came from credit cards. U.S. credit card spending was up 15%for the quarter, even as the number of open accounts fell by 5%.

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Not all of the news for Visa was rosy. As part of the Durbin Amendment’s new requirements, retailers now have the option of choosing which network they use to process card transactions. As a result, Visa is having to negotiate and offer more generous deals to merchants than it has in the past. Competition between card processors will erode some of Visa’s profitability in its home market.

I’m ok with that. To start, like the other provisions of Durbin that limit swipe fees, the rules only apply to U.S. transactions. Visa will soon get more than half of its transactions from outside the United States, and I see this percentage increasing with time.

Visa is what I call an “emerging markets lite” investment. It’s a backdoor way to get exposure to the fast-growing middle and upper classes of China, India, Latin America, and the rest of the emerging market universe — while still based in the U.S.

Visa is also one of the primary beneficiaries of the transitions to a global cashless society.

Yes, I realize that the world will never truly go “cashless.” Many shoppers appreciate the anonymity of paying with cash, and cash in some physical form will probably always be with us. Still, the percentage of transactions settled with “plastic” or through other electronic means grows every year, and the continued growth of internet commerce will only speed this along.

By some estimates, as much as 40% of transactions in the United States still take place with cash or paper checks, and the percentage is significantly higher in most emerging markets. Suffice it to say, Visa will have healthy demand for its credit and debit cards for the foreseeable future.

Visa is no longer “cheap” in strict value-investor terms, though it is far from expensive. It trades at 16 times next year’s expected earnings. Considering Visa’s room for growth in an otherwise lackluster economy, I consider this an attractive valuation. I reiterate my buy recommendation of Visa.

Disclosure: Visa is a current recommendation of The Sizemore Investment Letter and Sizemore Capital clients have a position in the stock at time of writing.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new Special Report: “3 Safe Emerging Market Stocks for a Shaky Market.” As of this writing, Sizemore did not own a position in any of the aforementioned stocks.

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