Best Ideas Portfolio holding Visa () posted yet another strong quarter Wednesday, with earnings and revenue coming in better than consensus expectations. Earnings per share, net of a one-time non-cash tax benefit, came in at $1.60 per share, a 30% increase compared to the second quarter of fiscal year 2011. Revenue grew by 15%, but the real story was in payment volumes. Debit and credit payments grew by nearly 7% in the US and Canada and accelerated to the low-double-digits in every other region in the world. We expect US growth to be modest, but we think the increasing acceptance of Visa cards in other countries will grow volume for many years to come.
CyberSource, Visa’s payment processing and risk management arm, saw billable transactions grow by 26% to $1.2 billion for the quarter. CyberSource was acquired for $2 billion in 2010, and it already looks like it was a bargain, given its explosive growth.
In addition to great second-quarter results, Visa raised its annual earnings-per-share forecast to the high-teens to low-twenties, which is about in-line with what we were expecting. The firm also reiterated its yearly outlook for revenue, operating margin, and free cash-flow generation, which should be north of $4 billion. We applaud management for using conservative estimates while weighing the impact of the Durbin Amendment, but we had expected the new legislation wouldn’t be as material as others may have imagined.
While the quarter was fantastic and the company’s prospects are as bright as ever, it’s important to note that Visa and Mastercard (MA) were investigated by the Department of Justice for debit-card pricing and strategies. CEO Joe Saunders noted that this has happened a few times over the last several years, and since the firms have more of a natural duopoly than anything, we don’t think the DOJ will pursue action against either firm.
It’s also interesting to note that Visa didn’t really buy back any stock in the quarter, suggesting management doesn’t think the stock is as undervalued as it was the past several quarters — when they gobbled up shares at a furious pace. Visa did announce last week that they will pay out a dividend of $0.22 for the quarter. Even though the yield is still far from enticing, we think Visa is a natural candidate to grow its dividend over the next several years.
Shares might not be quite as cheap as they once were, since the stock has moved from the mid $90’s to around $120 over the last few months, but we still think the company is a fantastic long-term investment. We’re currently evaluating adding to our position in the market-beating portfolio of our Best Ideas Newsletter upon any big market pull-back.