Best Ideas Newsletter portfolio holding Visa (V) and its rival MasterCard (MA) reported results for their respective calendar third quarters.
Visa’s top-line continues to expand, growing 8.8% year-over-year during its fiscal year 2013 fourth quarter to $2.9 billion, a tad shy of consensus estimates on nearly $1.1 trillion in gross dollar volume. The combination of the firm inking more major deals than usual (which increased incentives) and foreign exchange effects lowered reported revenue growth by 1.5 percentage points. Visa’s net income per share jumped 20% year-over-year to $1.85, in-line with consensus estimates. For the fiscal year, earnings per share soared 23% year-over-year to $7.59. Free cash flow, adjusted for some timing issues related to the merchants opting out of the legal settlement with Visa and MasterCard (accrued litigation), was equal to $6.9 billion.
MasterCard’s third quarter results were similarly strong thanks to a 16% year-over-year increase in revenue to $2.2 billion, which was slightly above consensus expectations (the firm had $1 trillion in gross dollar volume). Earnings per share followed suit, surging 18% year-over-year to $7.27, above consensus estimates. Year-to-date, MasterCard’s free cash flow is terrific at $2.9 billion, equal to 46% of total revenue. Though eBay’s PayPal (EBAY) and other smaller entrants have attempted to steal payment volume share, Visa and MasterCard remain unrivaled cash machines.
Guidance
Image Source: V 4Q13 Slides
Visa painted a rosy picture for fiscal year 2014, in our view. The company expects double-digit revenue growth, mid-to-high teens earnings-per-share expansion, and free cash flow of $5 billion. The firm marginally lowered its revenue target that it had issued at its investor day, but we think revenue could accelerate if a weak October turns out to just be an aberration. Visa’s CFO Byron Pollitt noted:
“While October’s first three weeks have upticked slightly to 9%, there has currently been some constraint in U.S. consumer spend, showing up in our numbers in both debit and credit. Our guidance encompasses what we are seeing in September and October and presumes that a tepid recovery in U.S. economic growth continues.”
MasterCard, on the other hand, doesn’t provide nearly as detailed guidance, though management commented that it anticipates the firm will meet its goal of compound annual revenue growth of 11-13% and diluted earnings per share growth of at least 20%.
Valuentum’s Take
We were very pleased with the results from both Visa and MasterCard. Though we hold shares of Visa in the portfolio of our Best Ideas Newsletter, we do not envision adding to our position at present price levels.
Disclosure:
RJ Towner owns shares of the following companies mentioned in this article: V