- Visa is scheduled to report its Q2 2016 earnings on Thursday, 21st of April
- Visa continues to face headwinds from weak cross-border payments and crash in oil prices
- Visa is likely to shed more light on its integration plans with Visa Europe.
Card Payments major Visa is scheduled to report its Q2 2016 earnings on Thursday, 21st of April, after the market close. Analysts expect Visa to report an EPS of $0.67 on revenue of $3.6B. The expectations represent a 6.3% YoY growth in earnings and 5.6% growth in revenue. Visa has seen a consistent growth in earnings and revenue in last few years.
Visa has a strong earnings history with an earnings surprise in three of the last four quarters. In the previous quarter, Visa had delivered a marginal beat on earnings with EPS coming in at $0.69 against analysts’ estimates of $0.68 per share. Since the last earnings, Visa stock is up more than 15% compared to around 10% increase in S&P 500 and Nasdaq.
Visa is in midst of one the most important corporate restructurings since its formation in 2008. Visa Inc is acquiring its European sister concern Visa Europe for almost 21 billion Euros, which includes an upfront payment of 16.5 billion Euros (two-thirds in cash and one-third in stocks), with the remaining amount being paid on completion of specified goals.
In the previous quarter’s earnings call, its CFO Mr. Vasant has said that the deal is likely to be completed by the end of the second quarter. Hence, investors must expect some definitive commentary on the integration of Visa Europe and growth opportunities. The guidance given by Visa for current year’s earnings and revenues doesn't include the performance of Visa Europe.
To finance the deal Visa has borrowed as much as $16 billion. While $16 billion is a huge amount, it will not add much risk to Visa’s previously debt-free balance sheet allowing it to retain its strong credit rating. Visa will use the cash to pay the upfront amount and to accelerate share buybacks to reduce the dilutive effect of the preferred shares issued to Visa Europe partners.
The borrowings will result in an interest payout of $125 million in the second quarter with offsetting benefits from Visa Europe. The interest charges will have an impact of $0.04 per share.
Weak global growth has also resulted in weak cross-country payments. Visa’s cross-border growth rates declined in the last quarter to 4% from 5% in the preceding quarter. Growth has also deteriorated in the Middle-east and other oil dependent countries due to collapse in oil prices. The deceleration of payments growth in oil dependent countries is likely to persist in the short term, adversely impacting Visa's performance.
Like all major multinationals deriving a significant portion of their revenues from international markets, Visa had suffered from currency headwinds in the last quarter. In its Q1 earnings call, Visa had expected the strong dollar to shave off 3% of its revenue growth in Q2. However, the dollar is down more than 4% YTD, while the Euro, Yen and Yuan have appreciated, reducing the currency impact on Visa's growth numbers.
On the profitability front, Visa expects expense growth rate to pick up in Q2. To quote Mr. Vyas from Q1 earnings call: "Expense growth rate will step-up to the mid-single-digit range with increases in personnel costs and the growth in network and processing expenses due to Russia". The company's profitability will also be impacted by the interest cost. Despite these impacts, Visa will remain strongly profitable. Last quarter, the company had reported a net profit margin north of 54% and a return on equity of 26%.
Visa stock is facing headwinds from declining cross-border payments and falling oil prices. The headwinds are likely to persist in short-term as the global growth continues to disappoint and the likelihood of an increase in oil prices looks remote. However, Visa's fundamentals looks solid. It has posted revenue growth of 11% in the previous quarter, has an operating margin north of 65% and is expected to grow its EPS at over 16% over the next five years. Visa stock remains a long-term buy on its solid fundamentals.