The battle to move consumers to credit cards from cash continues to rage. On Thursday, we’ll find out how much progress Visa Inc (NYSE:V) made during the third quarter when it announces earnings after the markets close.
Analysts expect earnings per share of $81 cents, 17% higher than a year earlier, on revenue of $4.36 billion, 20% greater than in Q3 2016. The whisper number is three cents higher.
Visa stock is getting awfully close to the sun trading within a few basis points of $97.75, its all-time high. Anything less than an earnings beat — the past four quarterly reports have been upside surprises averaging 7.6% which translates to 87 cents — will be met with complete contempt by investors.
On that basis, shares could drop by a considerable amount, perhaps double digits.
The Odds are Slim
A quick look back at its Q2 2017 earnings tells us the company is making big inroads internationally with revenues growing 46% in the first six months of the year to $4.7 billion. A year ago, Visa’s international revenues accounted for 44% overall; today, that’s up to 52% and growing.
The growth in processing transactions outside the U.S. is a huge driver for the company. On a constant dollar basis, payments volumes increased by 60% year-over-year for the first six months of 2017, five times the growth in the U.S.
Visa has become an international payments processor, to a great part due to its $20 billion acquisition of Visa Europe in 2016. Visa CFO Vasant Prabhu told analysts in its Q2 2017 conference call that the company is pleased with the results at Visa Europe, which bode well for Visa’s future.
Share Repurchases Troubling
The one fly in the ointment is Visa’s propensity to buy back its stock at an alarming rate. In fiscal 2016, Visa used 140% of its free cash flow to repurchase more than $7 billion in Visa stock, the only one of its peers to go past 100%.
Keep in mind 2016 was a unique situation because it had to offset the dilutive effect of issuing preferred shares to its Visa Europe members as part of its acquisition. Whether the rate at which it repurchases shares continues is something, investors should watch carefully in this report and those in the future.
However, unless it delivers a stinker, which is unlikely, the average price paid for the 91 million shares it acquired in fiscal 2016 was $76.92, a 26.8% paper profit through July 18.
Bottom Line on Visa Stock
As long as American consumers continue to use cash rather than credit cards, companies like Visa will continue to have opportunities to grow their businesses.
According to the Federal Reserve, more than 60% of the purchases under $10 are made with cash. That’s a huge piece of business to go after in the coming years. In 2016, Visa and Mastercard Inc (NYSE:MA) handled $4.3 trillion in payments in the U.S., double the amount processed a decade ago. Visa’s head of global merchant solutions, Jack Forestell, had this to say:
“The U.S. still has an enormous amount of headroom to grow in terms of displacing more cash … It’s a much more significant opportunity for us than trying to steal share from a competitor.”
So whether you own Visa or Mastercard stock, the future appears bright. We’ll find out Thursday after the close, how bright.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.