Visa Inc. (NYSE:V) has sharply rebounded from its December lows and is now trading back where it was before the market’s precipitous drop during the final quarter of 2018. Part of that can be attributed to the rock-solid financials of Visa Inc. The firm generates a sizable amount of free cash flow each quarter and is sitting on a great balance sheet with ample cash reserves and a relatively small debt load. Visa Inc. reported quarterly results for the first quarter of its 2019 fiscal year, which covers the three months ending on December 31, 2018, that reinforced its recent rally. Let’s dig in.
Financial Review
Visa ended 2018 with $20.1 billion in current assets versus $13.4 billion in current liabilities, good for a current ratio of 1.5x. Having a high current ratio is essential to ensuring ongoing financial flexibility. The firm’s long-term debt load of $16.6 billion is quite manageable considering the firm generated $3.3 billion in net operating cash flow in Q1 FY2019, versus just $0.2 billion in capital expenditures and $0.6 billion in dividend payments. When viewing excess free cash flow as net operating cash flow minus capex and dividends, Visa had $2.5 billion in excess FCF last quarter and $3.1 billion in free cash flow when not including the dividend payments.
At the end of last year, Visa was sitting on $8.3 billion in unrestricted cash, $1.5 billion in restricted cash in US litigation escrow, and $3.5 billion in investment securities. Not including the restricted cash, Visa’s net debt position is only $4.8 billion. Quarterly interest payments of $0.1 billion represented only a tiny sliver of Visa’s $3.0 billion in net income in Q1 FY2019.
$2.4 billion of Visa’s excess FCF was spent repurchasing Visa Class A stock in Q1 FY2019, which is a key way management is “distributing” cash back to shareholders. Share repurchases reduced Visa’s outstanding diluted share count by almost 3% from Q1 FY2018 to Q1 FY2019. Year-over-year net income growth of 18% aided by share buybacks grew Visa’s EPS by 21% year over year to $1.30 in Q1 FY2019.
Looking ahead, Visa is expecting to increase the rate it charges merchants relating to interchange fees and will also raise its fees for processing card payments. These increases are expected to coincide with fee increases from Visa’s competitors. Fee increases will likely lead to continued growth at Visa as long as its transaction volume growth continues. Visa’s total payment volumes and payment transactions both increased by 11% on a constant currency basis in Q1 FY2019 versus the same quarter a year ago. Both its credit and debit card programs witnessed strong growth during this period on a constant currency basis.
Visa posted 13% revenue growth in Q1 FY2019 on a year-over-year basis as its sales climbed up to $5.5 billion. The company’s operating income grew by 12% to $3.7 billion, which saw its operating margin weaken by nine basis points during that period. However, at 67.51% as of its latest quarter, Visa’s operating margin is indicative of a very healthy enterprise. Note that Visa’s operating margin will likely climb in the event fee increases are effectively rolled out. Double-digit revenue growth combined with a relative stable operating margin played a big role in boosting Visa’s net operating cash flow by 17% last quarter on a year-over-year basis, which climbed to $3.3 billion as mentioned previously.
Bidding War
Visa is currently bidding against Mastercard Inc. (NYSE:MA) for UK-based Earthport Plc (OTCPK:OTCPK:EPCUF), which provides low-cost payment services by reducing the number of intermediaries needed to transfer payments (allowing banks and money transfer service providers to work together without requiring a third-party beyond Earthport’s services). This offering is particularly useful in regard to cross-border payments.
Note Visa reported 11% nominal growth in its cross-border volume during 2018, or 9% on a constant currency basis, versus 2017 levels. That growth rate slowed considering during its Q1 FY2019 but was still up 7% year over year on a constant currency basis (only 3% growth on a nominal basis as the US dollar strengthened).
As things stand today, Visa offered 37 pence per Earthport share, beating out Mastercard’s offer by 12%. It is likely this isn’t the last offer for Earthport as it appears a bidding war is underway, with Mastercard now actively considering making a higher offer. The ability to both reduce costs by removing the need for third-parties and having the opportunity to move more aggressively into cross-border transaction services is a very appealing opportunity. Visa’s management commented that “cross-border is an area we're watching closely” during the firm’s quarterly conference call.
Final Thoughts
The shift from paper to plastic has been the driving force behind Visa Inc.’s rally as the run up in its stock price enters its eleventh year. Management is targeting new growth avenues, such as cross-border transactions, to keep the momentum going. Visa Inc. primarily rewards shareholders via capital appreciation opportunities, aided by strong net income growth and material share buyback programs, as its dividend yield is just 0.7% as of this writing. It will be interesting to see how Visa Inc.’s bidding war with Mastercard plays out, as Earthport would be a valuable addition to its business profile. Thanks for reading.
