Visa reported numbers last evening. This is one of the most exciting companies to own. And the thesis is pretty simple really. The fact that we are moving towards a cashless society with more speed and momentum than at any time in history means that this company will continue to be the beneficiary of a move away from physical currency. It is amazing to think that in an internet covered world, people still use physical cash as much as they do. I saw just the other day that the German finance ministry was mulling whether to put a cap on the Euro value of any transaction, 5000 Euros would be the maximum on a cash transaction. We often say when looking at Visa's business that governments, tax authorities, banks and financial institutions would prefer this type of ability to monitor all transactions, and thereby making the transportation networks and security carrying costs of cash obsolete. Of course not everyone has a cell phone and debit/credit card.
I have seen those that worry that the traditional networks will be jumped in favour of the newer technologies. What makes us think this won't happen is that the big switchers, Visa/MasterCard etc, already have built the trust and the infrastructure and all the other electronic payment methodologies will piggyback off the networks. Apple Pay for instance, which has hundreds of millions of phones as potential payment devices, uses the big pay networks. Stick your "physical card" into the application and pay at the merchant. Nobody ever sees the card, your thumbprint verifies the transaction, everyone is happy, most especially the banks who contend with credit card fraud all of the time. If it eliminates fraud, that makes everything cleaner for all concerned. In the future, there will be less cash, more electronic transactions, everyone except for the people printing money.
We will have a link to a more detailed report on Monday, the stock has taken some heat in the aftermarket, with guidance lower than anticipated. The stock is down 3.8 percent pre market, it is up (before this slide) over four percent this year. Herewith a preview of the results themselves, expect more Monday -> Visa Inc. Reports Fiscal Second Quarter 2016 Results.
(Part 2)
Visa results from Thursday night, let us flesh these out a little. The company reported Q2 revenues of 3.6 billion Dollars, that was 6 percent higher than the year prior. Visa reported adjusted quarterly net income of 1.6 billion Dollars, 68 US cents per share diluted earnings. Volumes are important here, each little swipe makes the business (and shareholders) money. A look back to the March quarter saw the constant year on year change in Debit and Credit cards payments volume increase in the low double digits, 12 percent. The total transactions increased by the same amount, 12 percent. The total number of credit and debit cards as of the end of last year was a pretty staggering 2.490 billion. I have three in my wallet.
It was also a busy quarter for the company, they bought back 1.8 billion Dollars worth of shares during the March quarter, the average price paid was 72.23 Dollars (for the full 24.2 million shares). At the end of the quarter, the company still has 23.4 billion Dollars worth of cash and cash equivalents, and available for sale investment securities. Treasuries, and the like. A quick reminder, the market capitalisation as per the Friday close was 189 billion Dollars, a fair chunk of cash percentage wise, 12.8 percent.
Let us discuss valuations quickly, the stock currently trades on 30 times historic earnings, the market is always expecting good things here. With a mere 14 cents a quarter dividend payout, the yield is a paltry 0.71 percent. Better than some negative government yields in Japan and Europe I guess. Market consensus sees the multiple unwind to 24 times next year, expectations are for 3.28 in earnings next year. Is that too rich? Methinks not at all, the company projects annual revenue growth of 7-8 percent, I saw Bright get excited about that number over the desk! With operating margins remaining in the mid sixty percent, free cash flows of 7 billion Dollars, this is a healthy looking business.
I was paging through a report on "cash", from a crowd called Europolcik, Germany issues an enormous amount of bank notes, relative to their GDP, 16 percent in 2013. France and Italy had numbers of 4 and 9 percent respectively. Also, there are around 1 trillion Euros worth of cash in issue in the common currency area, one-third of that is made up of 500 Euro notes, yet over 55 percent of respondents in a survey said they had NEVER seen such a note. The problem is that the notes are often used for illegal activities. Luxembourg issues nearly double their relatively small GDP in banknotes. The point is that Visa is going to have a big business in Europe and that they are going to be encouraged to keep the paper trail.
On that score (Visa buying the European business), the European Commission came back and said that the terms should be changed slightly. The deal is now likely to be delayed, and not expected to be completed by June 30, the cash consideration is set to be boosted by 1.75 billion Euros (nearly 2 billion Dollars). Let us just say that the wheels of bureaucracy are bigger and turn slower in some parts of the world!
This is a fabulous business, the thesis remains intact. More and more transactions will be made electronically, eliminating the need for cash, which comes with a whole host of security issues.
We continue to accumulate this business, it is a strong buy in our books.