Visa. No borders.
July 26, 2012 in Uncategorized
“Many governments around the world know that there are more benefits in getting paid electronically, than by any other traditional method. Checks are being phased out. In the United Kingdom the UK Payments board has suggested that by Halloween 2018, the system that processes checks (or cheques, whichever you prefer) be terminated.”
Jozi, Jozi. 26o 12′ 16″ S, 28o 2′ 44″ E. I suppose in the context of the European flipping and flopping (seemingly) a trading day ending with green on the screen was all we needed. Well, the bulls at least. There were several stocks that surged, MTN jumped out of the (virtual) page at me, the stock closed at 15103 on the day, at what I called a ‘normalised’ high. Why I say normalised is because back in May of 2008 there was deal related activity taking place from Indian suitors, but that fell away, and then the period of great pity passed, and MTN fell to less than half of where they are now. What I am trying to say is that if that deal related activity had not been present, the stock would not have traded north of 160 Rand a share, back then. So, in the absence of news, this is what I call a normalised high. In fact there is news, and in this case it might actually be that the Turkcell claim could be dismissed, this is something that we are lead to believe that should happen by year end. That is all that I have to say about that. I am guessing (from last year’s timing and SENS) that we should see results mid August, or early in the second half of August.
New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. It was a gentle roller coaster ride through the session, culminating in tech stocks being dragged lower by a selloff in Apple shares (down 4.32 percent) but a big session for some Dow Jones majors buoyed blue chips. Both Caterpillar (which Byron takes a look at) and Boeing had strong sessions, sending blue chips more than half a percent higher. It was one of those rare days when the constituents of the respective indices actually held sway over the others. Both Boeing and Caterpillar have higher prices than the bottom two thirds of the Dow Jones Industrials constituents. And because the Dow Jones Industrial average is a price weighted index, the companies with the larger stock prices make up most of the moves. In fact the top 9 shares (one below Boeing is United Technologies in 9th place overall) are more than half of the weighting of the overall index. Such is the insignificance of the bottom two, Alcoa and Bank of America, they form only one percent of the overall weighting, that if they both
Byron’s beats gets dirty digging through the Caterpillar earnings release.
- I love looking at Caterpillar results because not only are they a good indicator of the global mining and infrastructure sectors but they also put a lot of detail into their forward looking statements. I’ve said this before and I’ll say it again, I will much rather listen to what Caterpillar have to have say about the state of the global economy then an academic or even an analyst.
It was a record quarter for the company (surprise surprise) managing to grow earnings by 67% compared to this time last year. This came in at $2.54, comfortably beating analyst expectations of $2.28. Sales and revenue also came in at an all time quarterly record, $17.4bn up 22%. Analysts expect the company to make around $9.75 for the full year. Trading at $83 they sure look cheap, trading on a forward PE of 8.5 times.
But why? This stock is very cyclical and current share prices are all about what is going to happen in the future. In their forward looking statements they have revised sales down due to economic uncertainty but profits up due to better efficiencies. Business Insider do a fantastic slide show summarising their predictions. It’s called Caterpillar: This Is What The World Will Look Like For The Rest Of The Year. I strongly urge you to read it. Lots of pictures and well summarised.
At the end of the forward looking statement CEO Doug Oberhelman has the following to say. I like his ending.
“I am cautiously optimistic about the world economy in 2013, very positive on the long-term prospects for global growth and excited about the role Caterpillar will play in making that growth happen. After all, the road to progress begins with a road”.
We continue to like the stock. We know it is cyclical but as patient investors we are willing to ride the wave. Especially if you are getting in at these prices where most of the downside is already factored in. As you already know we are also in agreement with the CEO. As governments around the world act towards stimulus and the global market slowly wriggles its way out of this mess, 2013 and beyond look good.
Visa takes you places. Good timing for the release of the Visa Q3 numbers, the Olympics start tomorrow and lest you forget, they are one of the sponsors. I hope that the event organisers don’t confuse the priceless pay off line, with Visa, when in actual fact it belongs to MasterCard. Ouch, that was a sideswipe at the organisers of the football last evening who confused North Korea (the people’s democratic republic) and the South Korean flags. Well, at least the supreme leader/emperor seemingly got married. But we are getting off the topic here, we were talking about the Visa results. And I am pretty sure that one can’t use a Visa card in North Korea, such is the “progress” there.
The full results press release is available here: Visa Inc. Posts Strong Fiscal Third Quarter 2012 Earnings Results and Authorizes New $1 Billion Share Repurchase Program. And as you can see, excluding the provisions made for the recent settlement (remember the piece Byron wrote a mere 9 days ago: Visa settles lower) the company reported net income of 1.1 billion Dollars, which translates to 1.56 Dollars a share. That is a whopping 25 percent increase on the corresponding period last year. Volumes (all payments processed) grew only one percent to 13.1 billion for the quarter. Or, 14.55 billion payments a day, roughly 606 thousand an hour. 10 thousand a minute. That is how many payments Visa processed through VisaNet in the last quarter. Now that might sound a lot, but Visa is able to process 20 thousand transactions a second.
The company bought back 4 million shares at an average price of 115.51 Dollars a share. Good job, seems like about half a percent of shares in issue, so whilst this is not a big deal, shareholders should be happy with that. Better than being diluted by big stock awards. The outlook is pretty upbeat, the company expects revenue to grow, but not by much, but I guess low double digit increases in this environment is good. And they expect the class A stock (that is the one available to you and I) to record EPS growth of 20-22 percent, somewhere in that region. The stock was up afterhours, around one and a half percent better. The forward earnings estimates that I have seen put Visa on a rather demanding twenty times forward multiple, but the expectation is that the business can grow earnings by high teen to low twenty percent numbers for the next three financial years. So, at current levels a couple of years out you are paying less than 15 times earnings. We continue to rate the stock a buy.
This is an easy mistake to make, to confuse what the company actually does, I am serious, people often make this mistake. Visa are not a bank, not an issuer of credit cards, but rather a technology company that processes payments on behalf of customers who are happier to pay electronically, rather than using some of the good old fashioned payment methods, cash and checks. Who still owns and USES their checkbook? Anyone? So basically Visa processes electronic payments and makes their money by taking a handling fee. In fact it is spelt out pretty well if you look on their about us page: “Visa Inc. derives revenue primarily from fees paid by our financial institution clients based on payments volume, transactions that we process and other related services we provide. Visa’s innovations enable its financial institution clients to offer consumers more choices: pay ahead of time with prepaid, pay now with debit or later with credit products.”
This is the main reason that we like the company. Many governments around the world know that there are more benefits in getting paid electronically, than by any other traditional method. I am still pleasantly surprised that no retailer (that I am aware of) has taken it upon themselves from a security point of view to give shoppers a discount when they pay with a card. Half a percent is better than a kick in the pants. Checks are being phased out. In the United Kingdom the UK Payments board has suggested that by Halloween 2018, the system that processes checks (or cheques, whichever you prefer) be terminated. Small businesses are going to have to change. And Visa is in the middle of that, benefitting as hundreds of millions of check payments become online payments. Visa could still surprise to the upside over the coming years.
Currencies and commodities corner. Dr. Copper is lower at 335 US cents per pound, lower on the session, the gold price is also lower, last at 1602 Dollars per fine ounce. Sadly the platinum price is also lower, last at 1397 Dollars per fine ounce. The oil price, as is the case as the rest of the commodities complex, is lower at 88.18 Dollars per barrel. The Rand is weaker this morning, the risk off trade is taking place again, after a decent enough start. The Rand is last quoted at 8.43 to the US Dollar, 13.07 to the Pound Sterling and 10.22 to the Euro.
Parting shot. Greece. Should we care? It seems to be off the main radar for now, but I have seen a few reports that suggest that the chances of them leaving the Euro zone are huge, Citi now says that there is a 90 percent chance, and Niall Fergusson is quoted as saying that the Greeks are going to announce this on Sunday evening. Huh? Have the Greeks said this? I have just heard ECB governor, Mario Draghi say that the Euro is irreversible, meaning to me anyhow that once you are in, you can’t get out. And he has also said that the ECB will do anything to preserve the Euro. And he has also said that the Euro region has done an extraordinary amount over the last six months. So, whilst things are tough in the zone, I can promise that it is tougher in Albania.
Sasha Naryshkine and Byron Lotter
011 022 5440