Earnings Confirm the Long-Term Bull Case for Visa Stock

Visa (NYSE:V) stock is exactly the kind of name investors should own in a volatile market like this one. That’s true even with a solid bounce from March lows.

V Stock May Look Tempting Right Now, but There Are Rocky Times Ahead
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To some, V stock might not look ‘sexy’ enough. After all, shares have fallen from February highs — but they’re down only about 18%. Many other names have declined much further, and some investors might see those stocks as “cheaper”.

But that isn’t the right way to look at things. Most steep decliners in this market have plunged for good reason.

Carnival (NYSE:CCL,NYSE:CUK) is going to see years’ worth of pressure on demand. Heavily leveraged oil plays face a ‘double whammy’ of lower crude prices and heavy borrowings that need to be repaid. General Electric (NYSE:GE) stock has been halved, but will suffer from lower industrial demand, lower oil activity, and a struggling aviation sector.

Meanwhile, there’s a reason V stock has bounced nicely. It’s because investors, as I did, focused on the long-term opportunity and wisely bought the dip. But the good news is that further upside is still possible, even after the rally from March lows. The company’s fiscal second quarter earnings report last week shows why.

Earnings Look Solid

In the current market, quarterly estimates from Wall Street matter less than they used to. That’s a good thing, given that investors often give too much weight to whether a company “beat” or “missed” consensus in a single quarter.

For what it’s worth, Visa earnings did top analyst expectations. Again, that’s not necessarily a reason to buy V stock. Nor is it a surprise. Visa’s miss in its fiscal first quarter report in January was the company’s first since 2016.

But from a broader standpoint, I’d point investors to two simple metrics from Q2. Visa revenue rose 7% in the quarter, while operating expenses increased by only 4%.

In a quarter where demand collapsed in the final month, Visa still drove operating leverage. And demand truly collapsed. As detailed in the company’s earnings presentation, processed transactions declined nearly 30% year-over-year by the final week of the quarter.

Obviously, that kind of plunge hit revenue and profits in Q2. A slow recovery in April will hit Q3 results as well. But taking the long view, that performance highlights the strength and resilience of Visa.

Even in a quarter with a calamitous suprise hit, revenue still grew faster than expenses. Not many companies out there that can say that.

GDP-Plus

The case for Visa is built on its potential for so-called “GDP-plus” growth. That is to say, Visa should grow at a rate faster than that of the global economy (as measured by gross domestic product).

After all, economic growth will drive increased payments. But share gains for credit and debit cards will magnify that growth.

Visa earnings don’t stop there, however. The company can take share from Mastercard (NYSE:MA) and American Express (NYSE:AXP). Its margins can improve as revenue rises at a higher clip than costs. And then the company’s fortress balance sheet — the company has $13 billion in cash — can drive share repurchases which further improve earnings per share.

We saw all of those factors in Q2. Again, revenue grew 7% during a quarter in which worldwide growth was far more muted. American Express actually saw revenue decline year-over-year, suggesting Visa indeed is taking market share.

Net income grew basically in line with revenue, despite a modestly higher tax rate. And Visa bought back more stock. In fact, the company moved aggressively in March.

According to p. 38 of its Form 10-Q filed with the U.S. Securities and Exchange Commission, Visa repurchased 10 million shares in March alone, nearly 0.5% of its total outstanding. It paid an average price of $164 — a healthy discount to the current price.

The Long View for V Stock

And so the pillars of the bull case for V stock clearly remain intact. Of course, that alone won’t insulate Visa from near-term pressure on economic activity.

Indeed, the above-cited earnings presentation shows that processed transactions growth still was close to -30% for most of April. Cross-border volume, incredibly, declined over 80% last month. Q3 earnings in late July will look much, much weaker than recent reports.

But investors shouldn’t own V stock (or any stock) for a single quarter. And those volume figures highlight an intriguing and attractive part of the case for Visa stock.

In April, volumes accelerated in a key category: “card not present, excluding travel”. This is basically e-commerce (though some transactions like curbside pickup will be included as well).

By the end of last month, that category was growing at a nearly 30% clip year-over-year. That’s obviously not a surprise: consumers stuck at home are using their card for online purchases.

But what that acceleration reflects is a faster shift toward a cashless society. Consumer behavior is changing during this crisis. That behavior isn’t going to revert to the ‘old’ ways when normalcy returns.

There will be winners from that transition. I’ve highlighted Square (NYSE:SQ) as one such opportunity. Visa, however, is the simplest. It’s going to have an even greater share of economic activity when normalcy returns. That will drive earnings higher — and do the same for the V stock price.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.


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