Visa's (NYSE:V) recent financial results demonstrate the soundness of its business model. In fact, the company currently stands out as one of the more stable financial firms in the market today. Unfortunately, this is not the case in terms of the appeal of its share price valuation. This is an appealing company with an unappealing stock, but this could change, making this a stock to watch.
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Fourth-Quarter Results
In Q4, Visa's revenue improved 10% to $1.9 billion on the back of data processing growth, which expanded 32.7% and accounted for 38.7% of total quarterly revenue as processed transactions grew 9%. The largest contributor was domestic service revenue, up 2.5% to account for 43% of the total top line. International service revenues dipped slightly to $507 million, or 27% of sales. Total cards carrying Visa brands grew 5% in the quarter to 1.7 billion cards. Reported net income was positive at $514 million, or 69 cents per Class A common share, after a 45-cent loss in last year's quarter on a hefty litigation charge.
Full-Year Results
Full-year revenues grew slightly more than 10% as processing revenue again led the way with a 17.2% increase. Domestic service revenue grew in the low single digits, while international revenue grew in the double digits. Earnings came in at $3.11 per Common A share. The net profit margin came in at an impressive 34%.
Outlook
For the coming year, Visa expects 11-15% revenue growth and earnings growth of more than 20%. It is also calling for free cash flow to exceed $2 billion, or more than $4.30 per class A share. (Learn about the controversies surrounding companies commenting on their forward-looking expectations in Can Earnings Guidance Accurately Predict The Future?)
Bottom Line
Arch-rival MasterCard (NYSE:MA) is set to release its third-quarter results next week and last reported second-quarter operating earnings that grew 26.4% as the top line improved a modest 2.7%. Its net profit margin was 27.3%, which was right in line with Visa's most recent quarterly margin and demonstrates that both firms have compelling business models that rely on garnering fees from their powerful brand names and extensive transaction processing networks.
This model is especially compelling given it avoids credit risk. During its most recent quarters, Capital One Financial (COF) reported a 9.59% charge-off rate on its credit card receivables, while JPMorgan Chase (NYSE:JPM) reported its net charge-off rate of 10.3%, and Bank of America (NYSE:BAC) reported that 12.9% of its managed credit card receivables had gone sour.
Despite its sound and lucrative business model, shares of Visa are richly valued at a trailing P/E multiple of 24.8 and forward price-to-free-cash-flow multiple of 17.9%. In other words, this is currently an example of an appealing company with an unappealing stock. That said, it's one to keep an eye on should the risk/reward tradeoff eventually have more downside built into the shares.
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