Visa: Biding Time (NYSE:V) | Seeking Alpha

Prepared by Tara, senior analyst at BAD BEAT Investing

We did some big buying in Visa (NYSE:V) in March and April, and we went so far as to tell our members that this was an absolute gift under $150. When shares hit $200, we recommended pocketing some trading gains. Make no mistake, shares are attractive if they fall back under $200. We think there is more room to run here, but let the market hit the stock. Right now it has been biding time. Make no mistake, the stalling of the global economy due to COVID-19 shutdowns have caused obvious volume declines for Visa and related companies. It is simply a fact. We will closely be watching Q4 numbers when they are reported in a few weeks. The most recent earnings show us some key metrics were mixed, but these are the metrics you should be watching when Q4 is reported.

Revenue fell in Q3 as expected, but Q4 should see some stabilization

Every financial metric we watch begins with revenues. We have to tell you with the entire quarter being impacted by COVID-19, particularly with the international exposure, the results were expected to be hit hard, with April being particularly pressured. We think we see some stabilization when Q4 is reported. It seems every quarter we see exemplary growth in the top line, but this was broken thanks to COVID. The top line fell for Visa. While the growth has stalled, we expect it to resume in 2021.

The company is a “financial technology company” or a “fintech.” The company is constantly working to offer new and exciting ways to pay and get paid. This comes even with a massive economic slowdown.

We really like the future of this company. While the stock can be traded effectively, we expect a continued long and slow increase in share prices. Right now it is just biding time.

Patience will be rewarded.

That said, Q3 was disastrous on the surface, but was mostly expected thanks to the severe impact of COVID. Now, over the years, the story has always been how the volume continues to grow markedly. Now, with the slowdown, volumes were of course lower than they otherwise would have been. Volume will return soon. But longer-term, there is more to the Visa story. With more and more transactions globally moving away from cash and check to electronic means, Visa will continue to gain. This recent cashless push has been a slight boost as retailers are largely encouraging electronic payment. We will remind you that as more credit cards can be loaded onto smartphones, Visa stands to gain. We often look at bank reports for measures on credit card issuance, and those continue to be relatively solid. The company delivered a mixed report, and revenues slowed some from COVID-19, but were essentially in line. They missed consensus expectations by $10 million, coming in at $4.84 billion. You should really be watching this in Q4.

For now, expect Q4 to see some pressure, but we do think Q3 is the bottom. Q3 net revenue was a near 17% decrease from Q3 2019. This was primarily due to a 10% drop in payment dollar volume and a 13% decrease in processed transactions to approximately 30.7 billion. We think we see some stabilization if the economic reports are to be believed for Q4. With the stock having bided time, it may get a boost when Q4 is reported. Since COVID-19 was pretty much global in Q3, we saw cross-border volumes decline 37%. If we back out Europe, they fell 47%. We think they will rebound in fiscal Q4, relative to fiscal Q3.

Operational expenses fell in Q3, and should be tamed in Q4

Thankfully operational expenses fell in the quarter. However, they did not fall as much as we would have liked, but the decline was a positive.

We have to tell you that expenses have always been our biggest issue with the company. We would like to see these expenses rise a bit more slowly, boosting margins.

That said, with falling revenues, increasing expenses would have been catastrophic to margins. With the 17% fall in revenues, we were hoping expenses would decline in the high single digits this quarter. Operating expenses were down 5%, with lower advertising and marketing costs.

Earnings fell, but also should moderate in Q4

Here is the deal. Earnings have been pressured. Revenue fell sharply, while expenses fell modestly. Make no mistake, higher spending is justified by strong revenue growth and investments for the future. With the present reality, we were pleased that operational expenses fell. We think that strong expense management continues into fiscal Q4. That said, the increased spending did not cause margins to decrease relative to last year on an adjusted basis. This quarter, operating margins were 62%, falling from 67%. All of this led to a drop in Q3 EPS. Net income came in at $2.4 billion while EPS hit $1.06, falling 22% from last year’s $1.37. We really think the year-over-year declines subside.

Final thoughts as we await the Q4 report

If the cross-border recovery remains slow through the fourth quarter, the revenue mix shift away from cross-border will persist. Adding in the impact of the service fee lag, incentives as a percent of gross revenues are likely to increase by 2 to 3 points over the third-quarter levels. This percentage should normalize as cross-border volumes improve and the domestic volume recovery stabilize.

Right now we believe 2020 revenue will now approximate $22.0 billion to $22.8 billion. We see earnings at $4.95 to $5.20. We will be closely watching expenses in addition to payment volumes and processed transaction figures in fiscal Q4. That said, if the stock falls back under $200, give it consideration as it has bided time.

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Disclosure: I am/we are long V. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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