No sign of weakness in consumer spending spells big profits for this card giant

Recession, schmession. If there’s one on the cards, consumers are ignoring the gloom and continuing to spend up big. It’s all been wonderful news for retailers. And even better news if you are part of the credit card duopoly.

Visa (NYSE: V) announced its full-year report for 2022 overnight. They’ve had a stellar year - even despite closing up operations in Russia as a result of the invasion of Ukraine. Profits are up. Revenues are up. Transaction and payment volumes are up.

While operating expenses are also up, this factored the exit from Russia, support of employees in Russia and Ukraine, along with a litigation expense, and therefore don’t reflect a more difficult future for the business.

Visa is benefitting from the strength in consumer payments, resilience in e-commerce and a continued surge in post-pandemic global travel. It’s hard to see this changing in the next few quarters.

Nick Thomson, Portfolio Manager at Lakehouse Capital, says,

“There's a lot to like about the business. The key things are that it exhibits a classic network effect and also benefits from an attractive industry structure, effectively a duopoly with MasterCard, and some strong tailwinds from the secular shift to digital payments.”

In this wire, Nick shares some of the highlights from Visa’s FY22 result, and gives us his outlook on the company and its sector for the year ahead.

Visa (NYSE: V) FY22 key results

• Net revenue up 22% to $29.3bn
• Net income up 21% to $14.95bn
• Operating expenses up 26% to $10.5bn
• Earnings per share up 24% to $7
• Quarterly cash dividend up 20% to $0.45
• Payments volumes up 15%
• Processed transactions up 17%
• Cross-border volume up 38%

Note: This interview took place on Wednesday 26 October. Visa is a holding in the Lakehouse Global Growth Fund.

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In one sentence, what was the key takeaway from this result?

In short was the results were very much business as usual as consumer spending stayed strong and the results came in slightly ahead of expectations. Net revenue and process transactions grew about 22% and 17% year-on-year respectively.

What was the market’s reaction to this result? In your view, was it an overreaction, an under reaction or appropriate?

Appropriate.

It was a relatively muted response. The stock was up about 2% after hours but that doesn’t mean much. We’ll see what happens in the coming days. I’d assume it will be well received by investors but we’ll have to see what happens once we’ve had a few trading sessions.

Were there any major surprises in this result that you think investors should be aware of?

There were no big surprises but there were some interesting observations as there always are with a business like Visa.

The first thing I’d say is the acceleration in international travel continues to be a primary driver. It isn’t showing any sign of slowing down. Cross-border transactions rose 38% and 49% if you exclude intra-Europe (accounting for the conditions they’ve got there) which was strong. In our view, the strength is likely to continue to be above trend in the near-term and that’s largely because we’re coming into the busy holiday season. Some of the airlines have already confirmed they’ve got healthy bookings for the quarter ahead.

The second thing to note is management also provided some pretty positive commentary around the macro environment, which is reassuring. There’s a lot of current fears that we’re facing an imminent global recession. They highlighted stable broad-based consumer trends and emphasise stability in e-commerce. They’re also still seeing a general shift in spending towards services and experiences away from goods.

It doesn’t seem like recession fears are really impacting consumer’s willingness to tap their Visa cards at this stage.

Would you buy, hold or sell Visa on the back of these results?

Hold

We’ve owned Visa for several years now and the most recent results are largely thesis affirming. Momentum continues to be very strong, supported by the tailwinds from travel spending. The valuation is roughly 23x forward earnings which is fairly reasonable in our opinion.

Bigger picture, we think that the combination of a very attractive industry structure, being a duopoly with Mastercard, and the ongoing secular shift towards digital payments provides a great setup that will enable Visa to continue growing at attractive rates for many years to come.

How does this compare with duopoly partner MasterCard (NYSE: MA)?

I would say there’s some differences between them around the edges. Mastercard has a bit of a lean towards international, more than Visa. There are some other differences. By and large though, they are very similar in terms of the secular trends they’re exposed to. There’s always a question around why Visa instead of Mastercard. We invested in Visa because it was a business we’re more familiar with and they were the larger player. It’s conceivable we could own either or both in the future. They’re both very high-quality businesses in our opinion with very attractive long-term dynamics.

What’s your outlook on Visa and its sector over FY23? Are there any risks to this company and its sector that investors should be aware of?

We remain positive on the outlook for the year ahead.

There are two key reasons I think Visa is well positioned in the current environment.

1. They stand to benefit from the ongoing pandemic recovery and cross-border volumes which remains above long-term trends. This is likely to continue for the next few quarters.
2. They have a volume-based pricing model which means they have a nice natural hedge against inflation. Obviously in this environment where inflation is proving more persistent, they are well placed to pass on costs with very little impact to their business.

They wouldn’t materially impact our long-term view and the value of the business.

A final word on Visa

There's a lot to like about the business. The key things are that it exhibits a classic network effect and also benefits from an attractive industry structure, effectively a duopoly with Mastercard, and some strong tailwinds from the secular shift to digital payments. For them, it’s a case of doing what they’ve always done and continuing to execute on that. Even in this current macro environment we need to remember Visa has been on the right side of navigating challenging market conditions over multiple decades and we remain confident Visa will continue to do so for some time to come.