Maintain OUTPERFORM rating on top large cap payments play Visa Inc. (NYSE:V), reflecting further revenue/margin synergies from VE combination, metrics/volume strength from stable economic activity as well as potential, strategic ramifications from ongoing initiatives to "pitch" credit into Europe. This week's upcoming investor day will likely provide updates on the global state of cash/Check conversion into electronic payments, ongoing initiatives for financial inclusion of the "under-banked", recent efforts to capture the B2B market, and the potential impact of FASB revenue recognition rules.
Quarterly updates on credit/debit transaction volumes, cross-border trends; while retail spending trends have been choppy ("The Amazon effect"), networks' transaction/volume metrics remained strong; Cash/Check conversion to electronic payments; consistent with prior trends, Wedbush believes that north of 50% of global transaction volumes are still conducted using cash and checks ("PCE penetration"; developed vs. emerging markets); Updates on prepaid/"under-banked market opportunity (mobile acceptance, financial inclusion with government support; merchant-driven electronification); Updates on ongoing efforts to service merchants (product, processing, innovation, data/insights, engagements); and Market opportunities in BillPay, ACH, Mobile and B2B Updates on Visa's efforts to provide full access to its tools and services, including the Visa Developer Platform, a commitment the company made in early 2016 to open its network to software developers in order to facilitate faster corporate payments, simplified payment automation, electronic accounts payable solutions, adoption of invoice payments to virtual cards and driving more commercial card adoption to targeted verticals; "Visa Checkout" update: with roughly 20M accounts, and expansion plans into the Middle East and Eastern Europe; and Paypal partnership update.
The firm maintains its OUTPERFORM rating and $96 price target (24x its FY18E adj. EPS), reflecting the company’s attractive business model, growth prospects, and outlook for increasing shareholder returns. Wedbush points to a host of growth/scale catalysts, including the disintermediation of cash/checks by electronic payments, networks’ increased dominance in the payments eco-system, incremental revenue opportunities from European regulations, incremental catalysts from hyper-growth mobile payments, ACH-based revenue growth opportunities, and positive contributions from the VE combination.
The firm typically uses P/E multiples for valuing companies operating in the payments space. Historically, Visa generated revenue/EPS growth rates of close to 10% and 15-20%, respectively, relative to market's (S&P 500) growth rates of 5-7%. Accordingly, Wedbush's $96 price target factors a P/E multiple of 24x its projected FY18 adj. EPS, a 75% premium to market multiples, justified considering the company's ability to generate blended growth rates 1.5-2x higher relative to the market.