Earlier this month Visa (NYSE: V) posted its second quarter 2011 results, and the world’s largest electronic payments network continues to defy a stubbornly sluggish consumer economy. Net income for Visa was up 23% on revenue growth of 15%. Benefitting from a fairly aggressive stock buyback program, earnings per share were up a very impressive 28%. Visa repurchased 8.7 million shares worth $630 million at an average price of $72.58 — a 10% gain based on prices at time of writing. The company also announced a new buyback plan worth $1 billion.
Visa sits at the crossroads of two major secular trends that will shape the global economy in the decades ahead: the rise of the Emerging Market Consumer and the move to a global cashless economy.
This is not idle conjecture about what could happen. In fact, it’s happening now. While Visa managed to grow its American payments volume by 11.7, its “rest of world” payments volume — which is overwhelmingly concentrated in the emerging market economies of Asia, Latin American and Eastern Europe — grew by 21.1%. The “Latin America and Caribbean” segment and the “Central and Eastern Europe, Middle East, and Africa” segment posted almost unbelievable 33% and 34% year-over year-growth, respectively.
No, that’s not a typo. In these promising growth markets, payments volumes have increased by a full third.
Visa already gets over 40% of its payment volumes from emerging markets, and given current growth rates it will soon be the majority. This will only be accelerated by Visa’s plan to aggressively expand its options for paying via mobile phones and devices — an increasingly popular payment method in many East Asian countries.
The exposure to emerging markets, more than any other factor, is what I love about Visa. We’re getting emerging market growth rates without having to accept the risk and volatility of emerging market stocks. This is the essence of the “Emerging Markets Lite” strategy employed by the Sizemore Investment Letter, and I see this as being the single best investment strategy for the next decade.
While I consider both Visa and rival MasterCard
(NYSE: MA) to be big-picture “macro” investments, Visa is also attractive as a value play. The stock’s price/earnings ratio of 18 might seem somewhat expensive until you consider that Visa enjoys operating margins of 62%. Visa is a solid growth stock with international reach trading at a very reasonable valuation.
What About Dodd-Frank?
There is, unfortunately, one dark cloud hanging over the company. The final word on the Durbin Amendment to the Dodd-Frank financial reform act, which would cap the interchange fees that banks using the Visa logo can charge merchants, has yet to be heard. If approved, the Amendment would almost certainly crimp Visa’s growth rate in its American debit card business, which makes up 31% of Visa’s total transactions volume.
It is still unknown to what extent the fee caps — even if fully implemented as-is — would affect Visa. The fee restrictions directly affect the banks that issue Visa-branded cards, not Visa itself. Still, there are concerns that the banks would pressure Visa into sharing the pain. And if debit cards become less profitable, banks will be less aggressive in pushing them.
All of this assumes the amendment passes in its current form, which is far from certain. Several prominent senators and Fed Chairman Ben Bernanke have spoken out against the Amendment.
It remains to be seen how the Durbin debate plays out. But given the torrid pace of growth in Visa’s other businesses, any short-term pullbacks due to Durbin jitters should be seen as a buying opportunity.
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Charles Lewis Sizemore, CFA, is editor of the Sizemore Investment Letter.
