Best-idea Visa (V) posted another strong quarter Wednesday, exceeding even some of the bullish estimates. The company earned $1.49 per share for the quarter, and raised its full-year earnings-per-share growth guidance to the high-teens. Revenue increased 14%, to $2.5 billion during the period, with strong growth in service fees (up nearly 15%) and in international processing fees (up about 19%). As a result of lower future marketing expenses, a shrinking share count and a strong outlook, we continue to believe that Visa should fetch a price in the high $120s.
CEO Joe Saunders reassured investors that the company has fully accounted for the impact of the Durbin Amendment, which has further strengthened our conviction in the stock. Furthermore, the company expects to generate over $4 billion in free cash flow during 2012, which could lead to an additional buyback program or dividend increase (Visa announced a new $500 million buyback program in its earnings press release). The company currently has a whopping $7.9 billion in cash and equivalents, and we expect the company to continue to return cash to shareholders in coming periods. Given that the firm’s share price is below our fair value estimate, we’re in favor of buybacks at these levels. However, we’d be looking for management to increase the dividend once the shares approach the $120 level on the basis of our valuation.
Operationally, Visa continues to manage one of the most competitively advantaged businesses in our coverage universe due to its broad network. Importantly, this network continues to grow. In fact, Saunders indicated that international revenue will eventually be as large as its US business. Though we have factored in solid international expansion in our valuation model, as middle class consumers acquire purchasing power in emerging markets, there could be further upside to our fair value estimate.
V.me, Visa’s digital wallet, expects to hit major banking partners through the course of this year. Visa will provide customers with a variety of mobile services, which we suspect will help increase product stickiness. We think V.me should be able to compete with Mastercard’s (MA) Google Wallet partnership, since we aren’t particularly bullish on Android (GOOG) products. Specifically, recent market share data revealed that products powered by Android are shrinking as a percentage of the mobile market. We also expect Visa to become more active in the personal money transfer arena in coming years.
All things considered, we believe Visa will continue to outperform the broader market, and we think the firm represents a core holding in the portfolio of our Best Ideas Newsletter.