VISA INC. $79 (New York symbol V; Conservative Growth Portfolio, Finance sector; Shares outstanding: 2.4 billion; Market cap: $189.6 billion; Price-to-sales ratio: 13.3; Dividend yield: 0.7%; TSINetwork Rating: Above Average; www.visa.com) operates the world’s largest electronic payments network. It can process over 65,000 credit, debit, prepaid and commercial transactions per second.
Visa gets most of its revenue from the fees it charges card issuers and merchants that use its network. These fees are based on transaction volumes and other factors.
The banks that issue the credit cards are responsible for evaluating customer creditworthiness and collecting payments, not Visa.
The company earned $1.6 billion in its second quarter ended March 31, 2016. That’s a gain of 4.9% over $1.55 billion a year ago. Earnings per share rose 7.9%, to $0.68 from $0.63, on fewer shares outstanding.
Revenue improved 6.4% in the quarter, to $3.6 billion from $3.4 billion. Visa processed 18.5 billion transactions, up 8.8%.
The company set up its European operations (Visa Europe) as an independent firm in 2008. Over 3,700 European banks own this business, which uses Visa’s brand and payment networks under a licensing deal.
The company recently agreed to buy Visa Europe. Under the deal, it will pay 13.25 billion euros in cash (1 euro=$1.12 U.S.), plus convertible preferred stock worth 5 billion euros.
Visa expects to complete the purchase in the next few months. Combining the two operations will allow it to cut $200 million from its annual expenses by the end of the 2020 fiscal year. It ends September 30, 2020.
The company can easily afford this acquisition. As of March 31, 2016, its long-term debt of $15.9 billion is a low 8% of its market cap. It also held cash and investments of $19.9 billion.
Excluding the European operation, Visa expects its revenue for all of fiscal 2016 to rise between 7% and 8%. As well, earnings per share will probably gain 11% to $2.90. The stock trades at a high 27.2 times that forecast. However, that’s a reasonable multiple in light of Visa’s high market share. It also stands to gain as more people use cards instead of cash.
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