Visa, another great quarter!

Last night we received third quarter results from what is now our biggest holding in New York, Visa. Thanks to its performance and consistent additions it has overtaken both Apple and GE in our portfolios. So far this year the stock has returned 23.2%, 48.51% over the last year and 155% over the last 5 years. That is just the share price and excludes dividends. Let's look at the results and see if we can expect these kinds of returns going forward.


Net income for the quarter came in at $1.2bn which was up 16% compared to this period last year. Earnings per share came in at $1.88 which is up 20% and comfortably beat expectations of $1.79. They expect operating margin to come in at 60% for the year and earnings to grow over 20% for the full year. That sounds impressive but the market already knows this. Earnings for this year are expected to come in at $7.58 and $9 next year. The share currently trades at $190 or a forward earnings multiple of 21. For a share growing earnings in the lower 20's I think that multiple is easily justified.


The payment volumes are huge! In the 3 months the volume eclipsed $1 trillion which is up 9% from the comparable period. It is interesting to see how Visa categorise their revenues, see below from the report.


"Fiscal third quarter 2013 service revenues were $1.3 billion, an increase of 7% versus the prior year, and are recognized based on payments volume in the prior quarter. All other revenue categories are recognized based on current quarter activity. Data processing revenues rose 15% over the prior year to $1.2 billion. International transaction revenues, which are driven by cross-border activity, grew 14% over the prior year to $854 million. Other revenues, which include the Visa Europe licensing fee, were $179 million, a 1% increase over the prior year. Client incentives, which are a contra revenue item, were $521 million and represent 15% of gross revenues."


After doing a bit of research I have worked out that service revenue is what Visa charge the banks. Obviously Visa give the banks a great service. If your bank did not have Visa or Mastercard you could not do swipe transactions. Data processing revenues comes from the actual transaction when you swipe your card at a merchant. This will be paid by the merchant and Visa and the bank will split the revenues. International transactions is self explanatory, when you swipe outside your own country, that service is provided by Visa. The Europe licensing fee, I have explained before. Visa do not actually own Visa Europe, the banks do and they pay a fee. Client incentive revenues will be loyalty points type products which as mentioned is contra revenue.


The other day I saw an interview with the Mastercard CEO Ajay Banga and he stated that 85% of transactions still take place in cash. Although I am sure he is talking about volume of transactions as opposed to actual value it gives you a good indication of the potential growth of these companies. The company also announced a further $1.5bn buyback programme. We continue to add to Visa even at these levels.