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Visa - Earnings beat forecasts despite step down in US growth

Visa's third quarter revenue grew by 13% to $8.1bn, ignoring the effect of currency movements, broadly in line with analyst expectations...

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Visa's third quarter revenue grew by 13% to $8.1bn, ignoring the effect of currency movements, broadly in line with analyst expectations. The strongest growth was seen in cross border volumes, excluding Europe, which were up 22%. Payments volume growth was more muted at 9% due to a fall in US growth over the quarter. This was mainly driven by moderating inflation which implies slower increases in the value of transactions processed by the Visa network.

Underlying net profit increased at a slower rate, up 7% to $4.5bn, as a small fall in operating expenses failed to offset an increase in the tax rate from 10.9% to 19.2%.

Visa generated free cash flow of $13.1bn up from $12.3bn. Net debt was $12.5bn at the end of the period.

The group bought back $3.0bn worth of shares, and a dividend of $0.45 per share was announced.

The shares opened flat following the announcement.

View the latest Visa share price and how to deal

Our view

Despite slowing growth in transaction volumes, Visa has still seemed resilient amongst consumers. Although, it's an area where we do have some concerns. That's because about 50% of Visa's transaction volumes are US-based. Here consumer debt levels have grown relatively quickly in recent years. And recent troubles in the US banking sector have seen lending criteria tighten. Together, this could spell trouble for consumer spending. With the cash-to-card transition arguably complete in the US there are relatively few levers Visa can pull to mitigate a slowdown in its largest market.

A sharp economic downturn could see credit defaults start to swell, but for now, Visa's benefiting from higher credit spend without that risk looming. Despite appearances, Visa isn't a 'credit card company'. It doesn't lend consumers money or run accounts, so it's not on the hook for the money if a customer defaults. Instead, Visa charges banks for transferring funds.

Service revenues are charged to card issuers and are calculated based on the value of the transactions. Data processing revenues depend on the number of transactions that take place and are charged to the bank of both the customer and the receiving business. Cross-border transactions come with additional fees and currency conversion revenues. And this area of the business is enjoying a rebound as travel resumes.

We're supportive of Visa's attractive business model. Additional transactions are virtually costless, so extra revenue turns straight into profit. But Visa is lagging its competitors in terms of non-card services. Whilst this is a growth opportunity it may come at the cost of lower margins and could require significant investment.

Net debt's currently easily covered by free cash flow meaning there's plenty of spare cash to go around. Surplus cash is being returned to shareholders through a combination of dividends and share buybacks. The emphasis is on the latter, meaning the prospective yield is a modest 0.8%. Remember no shareholder returns are guaranteed.

Competition from start-ups and more established rivals has become a greater risk recently. But it's not one Visa's left unchecked. The group's been making strategic acquisitions, with the latest additions to the fold including Tink and Currencycloud and Pismo. These are more digital-focused financial tools and could also accelerate Visa's growth outside of the US. We're supportive of Visa's efforts to broaden its revenue streams in this way.

Long-term, we see payments in general, as an attractive business. Visa's valuation's not as demanding as it's been in the past, in part due to recessionary concerns, but it's growth rate has not been as impressive as some of its peers. Its relatively high exposure to the US means that may continue to be the case for some time to come.

Visa key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 26th July 2023