The economic recovery in the United States and consistent growth in emerging economies like China have resulted in higher consumer spending across the globe. This has proved to be a blessing for industries like retail, housing and automobile.
Apart from these, one other industry that has benefited from greater consumer spending is the credit card business. One of the leading companies in global payments technology, Visa Inc (NYSE:V) reported robust results for Q3, 2013 on the back of better spending and a surge in credit transactions.
Let us now look at some important metrics.
A healthy quarter
Visa Inc (NYSE:V)’s net revenue grew a massive 17% in the third quarter, which also includes considerable savings on client incentives. The growth in income was essentially brought about by a broad based increase in payment volume. For the June quarter, global payment volume growth in constant dollar terms was 18%, attributable to consistent growth across all regions in the U.S. The company incurred less on client incentives this quarter, which also enhanced overall profits. The amount spent on client incentives decreased by 200 basis points as a percentage of gross revenues in Q3, 2013 as compared to Q2, 2013.
Agreement with JPMorgan Chase & Co. (NYSE:JPM)
Visa Inc (NYSE:V)’s service revenue was down sequentially from Q2, 2013 but grew 7% on a year-over-year (YoY) basis. The primary reason behind this is the 10-year deal that was signed between Visa and JPMorgan in February. As a result of the deal, Visa Inc (NYSE:V) earned fewer gross fees in the quarter. However, it was offset by a reduction in client incentives, also a consequence of the deal. Additionally, JPMorgan Chase & Co. (NYSE:JPM) will also transfer extra credit and debit card volume to Visa Inc (NYSE:V), which will supplement its revenue in the future.
Visa has some really strong numbers
Now, let’s talk a bit about Visa Inc (NYSE:V)’s financials. The first thing that catches my attention is the fact that it is a zero debt company, which is quite a favorable sign. Besides this, its current ratio works out to nearly 1.8, indicating reasonable liquidity to meet long term or short term payment problems. While the operating and marketing expenses increased in the quarter, stronger than expected revenue helped the company achieve a comfortable operating margin of 61%. It is definitely good to see that the company has sustained a healthy margin over time in spite of investing considerably in growth opportunities and brand promotion.
There are some things money can’t buy, for everything else there is…
If Visa is one huge pillar in the payments technology industry, Mastercard Inc (NYSE:MA) is the other. Its stock has gained approximately 37% over the last 12 months because of consistent earnings and sustainable growth record. The company is due to announce its quarterly results on July 31 and is expected to perform well in light of the improving economy and with more customers shifting to credit and online payments. Even though I completely love the way Mastercard Inc (NYSE:MA) has created value for its shareholders, I am not highly positive about the company’s current valuation. It has a PBV ratio that is twice of Visa’s, while its earnings growth has been slightly lower than Visa in the recent quarters.
Recently, Canada’s competition tribunal dismissed a case against Visa and Mastercard thereby upholding their rules prohibiting surcharges on use of credit or debit cards. It dismissed the Commissioner’s appeal to allow merchants to impose surcharge on customers paying by credit cards. This is healthy news for the credit card companies who could have lost on reasonable customer activity had merchants been allowed to impose extra charges for use of cards.